Earnings Call Transcript - INSE Q1 2025

Operator, Operator

Good morning, everyone, and welcome to the Inspired Entertainment First Quarter 2025 Conference Call. Please note, today's event is being recorded. Please refer to the company's safe harbor statement that appears in the first quarter 2025 earnings press release, which is also available in the Investors section of the company's website at www.inseinc.com. 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 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 would now like to turn the conference call over to Lorne Weil, the company's Executive Chairman. Mr. Weil, please go ahead.

Lorne Weil, Executive Chairman

Thank you, operator. Good morning, everyone, and thank you for joining our first quarter call. With me here, as usual, are Brooks Pierce, James Richardson, and Eric Carrera. First quarter adjusted EBITDA of about $18.5 million was nicely ahead of last year, growing at close to 20% despite some unexpected negatives. As Brooks will discuss in a few minutes, the Leisure business was hurt by the slippage of the U.K. Easter holiday from the first to the second quarter, which is a very important period for the business. Some onetime product sales similarly slipped from the first into the second quarter, and there were disturbances in Brazil as new regulations, including new taxes, came into effect. And finally, we lost about $1 million of EBITDA due to the reclassification of lease revenue as we discussed recently at our year-end call. So in summary then, we were actually very pleased with the underlying progress in the first quarter. Following the close of the quarter, we have successfully negotiated the refinancing of our existing publicly syndicated bonds due in June 2026 with a 5-year sterling-denominated floating rate financing with Barclays and HG Vora. We expect to sign definitive agreements and to have the new financing in place next month. As previously discussed, we hope to complete the sale of our holiday park business in the relative near term, and we intend to use the proceeds towards deleveraging. Finally, as compared to our existing bonds, the new financing will allow much greater flexibility going forward. All in all then, we're very pleased to have successfully negotiated this financing in a less-than-ideal environment with 2 lenders with whom we have had a great relationship for many years. Let me stay on this issue of deleveraging for a moment. Once we finalize the sale of our holiday park business, we will have divested the part of our business with the highest relative capital intensity. As we explained in the past, our recurring retail betting shop revenue in the U.K. and Europe is, at this point, predominantly capital light. And in North America, our retail business is a combination of equipment sales and recurring content revenue similarly involving essentially no CapEx. So our 1 remaining capital-intensive retail segment is the U.K. pub business. And here again, we have begun to implement a plan to mirror our other retail businesses where we will sell the equipment, generating recurring and predictable content and server platform fees and minimize CapEx. As was the case with our betting shop business, there will be some loss of pub revenue in the transition phase since there will no longer be a return of capital component in pricing, but this will ultimately be outweighed by the free cash flow and deleveraging benefit. Our goal with all these initiatives is to get our annual CapEx to around $25 million, almost all of the content-related for both our retail businesses and, more importantly, our rapidly growing and very profitable digital businesses. So let me then turn to a discussion of our digital businesses. Our Interactive business continues on its incredible growth trajectory with revenue and EBITDA in the first quarter growing 49% and 79%, respectively, over Q1 2024, and margins expanding from 54% in 2024 to 64% in 2025, demonstrating the incredible scalability of this business. Virtually every week since the close of the quarter has recorded a new high. Our business in the United States in the first quarter grew by 90% against underlying market growth of about 20%, reflecting the quality and quantity of our content and the intensity of our account management. And bear in mind that we have only begun to see the potential for Hybrid Dealer. It's pretty clear at this point that looking ahead, the individual states in the United States are being forced to be far less dependent on the federal government in terms of health care, education, housing, and so forth, and there will be a predictable requirement for new sources of state revenue. This is inescapable. I mentioned previously that in states like Michigan, New Jersey, Pennsylvania, and, most recently, Delaware, iGaming, where our interactive business participates, overwhelms sports betting in terms of revenue and profitability. So looking back over the arc of the 50-year history of the relationship between gaming and state finances, we can see pretty clearly how this is going to play out, and we're ideally positioned to benefit. Our Virtual Sports business continues to show a remarkable level of profitability, although obviously accompanied by difficult dynamics. While the year-over-year quarterly decline in Virtual Sports EBITDA unfortunately masks the overall strength and acceleration of the rest of the business, the sequential performance is telling a somewhat different story. The data from the last several weeks is indicating that the business has essentially stabilized. And as Brooks will discuss in far greater detail, driven by a number of important initiatives, we expect the business to return to year-over-year growth by the third quarter or certainly the second half of this year. Together with the strength in our Interactive and retail businesses, this would allow for an acceleration in aggregate company performance. And with that, I'm pleased to hand things over to Brooks.

Brooks Pierce, CEO

Okay. Thank you, Lorne. I'll go through each business segment in some detail. My remarks will be a little longer than usual as we have a number of items to cover to give a comprehensive perspective on what we're seeing in the business and the markets we serve. So again, just reiterating what Lorne said, let's start with the Interactive segment that continues to produce incredibly strong results, and that momentum is carrying over into the second quarter with Q1 revenue increasing 49%, and as Lorne mentioned, adjusted EBITDA increasing 75% over the same period, continuing the trend of substantial growth and increased operating leverage. Although this growth is broad-based geographically, where we've seen the biggest growth year-over-year is in North America, where we've now added Delaware through our partnership with Rush Street, and the partnership is off to an outstanding start. Our game designers have increased their focus on U.S. style games, which has really paid off with leading titles like Wolf It Up! and Big Piggy Bank. They use a unique game mechanic that's resonated with players. We recently completed a tour of some of the key U.S. operators, and they affirm that our games are continuing to grow with them and that they are some of their key titles. Additionally, we're excited to be adding some key markets later this year in North America and abroad with our games going live in West Virginia as well as in South Africa. Now let's go over to Hybrid Dealer. So Hybrid Dealer, which comes from a combination of the game design and virtual design teams, is a product category we've talked about a lot and is now scaling rapidly. So this product has 3 derivatives at the moment, so the branded wheel games, single zero roulette, and 4 Ball Extra Bet roulette, but we have many more derivatives in development that we're excited to get out to the market. Our branded wheel games are live with both BetMGM and Caesars in New Jersey, and in Michigan with BetMGM and with Caesars going live in Michigan and Ontario likely in the second quarter this year. We'll also deliver this product to the Pennsylvania market once we receive the requisite regulatory approvals. BetMGM Bonus City has now been live for over 14 months and has enjoyed sustained performance and even has seen substantial increases in total value played over the last 2 months. We're obviously gratified to see that this product has the staying power and continues to be enjoyed by players more than a year after its launch. We now also have both single zero roulette live in the U.K. with bet365 and with Gamesys and integrated with Relax, which has it deployed with a number of operators. We expect to go live with Loto-Quebec in May and expect that, that will be a key launch for us. We'll also be rolling this out with a number of operators in Brazil here in the second quarter and later in the year, starting with bet365 in Brazil. Then moving on to the latest derivative game, the 4 Ball Extra Bet game now live with Gamesys and Relax, and the early results are encouraging. We'll be rolling this out to bet365 and BetMGM in New Jersey later this quarter as well as to a number of additional integrators in multiple markets. Needless to say, it's a very busy time with this product category and we'll start sharing metrics later in the year as it settles in. But I can say safely that the combination of continued growth in the core iGaming segment, along with the accelerating rollout of Hybrid Dealer, has us feeling very good about this segment of the company. Going over to the Virtuals business. We're encouraged by the stabilization we've seen in the business after a clearly challenging start to January due to the move to a fully taxed and regulated market in Brazil that's been discussed broadly across the industry. We were no different and were impacted as well but have seen a steadying in that market from our 2 biggest customers in the last few months. We also have a number of key initiatives happening over the next several quarters that we believe will put Virtuals back on a growth trajectory. We're focused on launching our licensed content, such as the NFL, NBA, and NHL. They cater to a North American audience with key operators in North America, and we aim to be able to go live with BetMGM during the second half of the year. In Brazil, although it's early days, we've launched a Brazil-specific soccer game in Portuguese and with local stadium views. The early performance numbers are encouraging with 1 operator showing stakes growth of over 25%, and we'll be deploying this version to our largest Brazil customers over the next several months. In Greece, OPAP's adding a fourth Virtual Sports channel to its retail estate that should drive incremental play. And we've also just gone live in Turkey through our partnership with Sisal-Flutter to add our Virtuals products in 2,000 retail shops with monitors, in addition to another 3,000 shops where customers would be able to bet using a QR code. Finally, we're excited to launch our lottery game with the Virginia Lottery here in the second quarter, which will be our first online lottery deployment in North America through a partnership with Aristocrat Interactive and with a very successful iLottery operator in the Virginia lottery. We're very active in the lottery space in both North America and around the world, and we expect this to be a very good channel for the Virtual Sports product. Moving on to the Gaming segment. The business continues to perform well through a combination of new cabinets with a key customer as well as cost savings initiatives being realized despite some macroeconomic challenges in the retail sector in the U.K. We successfully delivered and installed the 5,000 Vantage terminals to the William Hill state on time and on budget, and we're seeing high single-digit growth from this customer year-over-year. In Greece, we also expect to see the benefit of the rollout of our newest terminals in the market throughout this year and have a road map of strong local-based content that will be delivered. And in Illinois, it's early in the trial period, but we are seeing strong performance from our portrait style Valiant cabinet. Our game subscriptions were taken up by almost all customers in the market, leading to the strongest game performance since we went live there several years ago. And finally, our Leisure business performed as expected with the 1 notable point that Lorne mentioned being that the U.K. holiday was in the first quarter last year and in the second quarter this year, which caused a disconnect in the performance numbers. And now that we've had that holiday period, we've seen strong results at the holiday parks over that holiday weekend. With that, I'll hand it back over to Lorne for any closing remarks.

Lorne Weil, Executive Chairman

Thanks, Brooks. That was a great summary of actually an incredible range of activities going on in the company right now, but I don't have any further comments to make. So operator, if you could please turn the program over to Q&A.

Operator, Operator

Our first question comes from Barry Jonas from Truist Securities.

Barry Jonas, Analyst

The main question we're getting now is just on the tariffs in the U.S. Can you maybe just talk about the ramifications on the business, both on the cost side and also if you're seeing any changes in operator or player behavior?

Brooks Pierce, CEO

Yes, tariff is not a big issue for us because really, the only impact could potentially be in sales in Illinois, which is not a huge part of our business. Ironically, being kind of U.K. based, we have an opportunity to sell into the Canadian markets that we think actually the tariff issue could actually potentially help us. But frankly, the tariff issue, not a big issue for us as we're seeing it right now.

Lorne Weil, Executive Chairman

Well, there was something in the press this morning about President Trump announcing a trade deal with the U.K. If that's true, then we obviously don’t have any issues with tariffs.

Barry Jonas, Analyst

Okay. Just I mean, one of your customers reported last night on the Interactive side and said not really seeing much. Just confirming across your U.S. Interactive base, it's the same thing, no expected ramifications?

Brooks Pierce, CEO

No, not at all from a consumer perspective. I think as I mentioned earlier, the first quarter was excellent and the positive trends are continuing. Now that we're nearly halfway through the second quarter, we’re not experiencing any slowdown in the Interactive numbers.

Barry Jonas, Analyst

Got it. So appreciate the commentary about the holiday park business sale and then reworking the pub business. Does that sort of set you on the path to hit that 40% EBITDA margin target you've talked about in the past and maybe just a sense of timing to achieve that goal, broadly speaking?

Lorne Weil, Executive Chairman

Yes. I believe that once it is finalized, it positions us well for the future. It essentially ensures that we will achieve EBITDA margins comfortably exceeding 40%. We are cautiously optimistic that we will accomplish this, certainly this year, and hopefully in the next few months.

Operator, Operator

Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Ryan Sigdahl, Analyst

I want to talk about Virtual Sports. Looking back at your comments from March 17 when you reported Q4, you mentioned that we had indeed passed the inflection point and saw stabilization in Virtual Sports during the first quarter. However, the numbers have significantly declined, both sequentially and year-over-year. I understand the reasons, including the situation in Brazil and the transition period that Flutter mentioned, as well as the challenges with customers. But what caused the shift from when you last spoke at the end of the quarter to the results we saw?

Brooks Pierce, CEO

Yes, I think there are a couple of points to discuss. Regarding stabilization, we are currently in early May, which gives us about 7 or 8 weeks of data to analyze since March 17. We do observe signs of stabilization. However, we still experience week-to-week volatility. We feel more confident in our analysis now compared to when we discussed it in March, as we have had more time to assess the situation. Over the course of 13 or 14 weeks, we do see stabilization, but there are fluctuations each week. The primary challenge we noted at the start of the quarter was related to customer onboarding in Brazil, along with the impact of the tax rate.

Lorne Weil, Executive Chairman

Yes, Ryan, just to clarify, when we discussed this in March during the year-end conference call, we had results from most of January, February, and March. Although we anticipated the first quarter would be down sequentially from the fourth quarter, it was at a diminishing rate. By March, it was clear that after the decline from the fourth quarter had ceased, we leveled out during January, February, and March, and we continued to see that stability in April and so far in May. Therefore, we feel confident that we have reached the bottom of the Virtual Sports volume, and we expect to see growth from this point onward.

Ryan Sigdahl, Analyst

Great. Glad to hear the debt refinance. Anything you can share from a term standpoint how the rate may or may not compare to the existing?

Lorne Weil, Executive Chairman

Sure. so let me start answering that, Ryan, by saying that in that refi, we had a bunch of objectives: to push the maturity out obviously, for 5 years; very importantly, to minimize the call protection so that we have maximum flexibility, for example, to either refinance or to make a major M&A transaction going forward. We want a floating rate to take advantage of the downward sloping forward so in a sterling curve. And ideally, we also wanted a starting rate that was inside where our current brands were trading in a pretty tough market. And I think we accomplished all these, given, obviously, that there are trade-offs among them. We could have agreed to a fixed rate and had other better terms, but I think the idea was to get the best possible package of stuff. So with the rate reduction that coincidentally and fortuitously was announced this morning by the Bank of England, our going-in rate of 6 points over so-called SONIA is a little over 10%. And given the slope of the curve and the currently projected rate reductions, we feel that we'll comfortably be at about 9.5% by the end of this year. And beyond that, we have 2 steps down in the spread as we deleverage, beginning with the anticipated sale of our holiday park business later this year. So in terms of an interest expense number, let's say, Ryan, for modeling purposes, I think $30 million in interest for 2026 is a very safe number, and we could see reductions from there as either the SONIA rate drops more or more likely we get the benefits from deleveraging. This is a little higher than where we are now. But from a cash point of view, given the very significant reduction in CapEx as I noted previously, we should be well ahead in terms of free cash flow. Hopefully, that answers your question.

Ryan Sigdahl, Analyst

That was very, very helpful. And flexibility, yes, is very important in this market with everything else going on. Looking forward to hearing the holiday park sale and that's it for us.

Operator, Operator

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

Jordan Bender, Analyst

I maybe want to follow up on the prior conversation. You mentioned several times the intention to deleverage and in past quarters, you've been comfortable with the balance sheet. Is that new way of thinking really just a function of the terms of the new debt? They just become more favorable as leverage continues to fall? Is that kind of what you're getting at, Lorne?

Lorne Weil, Executive Chairman

Well, yes, certainly, with a new debt deal where we benefit from deleveraging, it gives us plenty of incentive to deleverage. But in a way, it was also the reverse that in negotiating the deal, because we were pretty confident that we were going to be deleveraging, we were willing to enter into a deal where we would get to where we feel we want to be once we deleverage. So I think the deleveraging has always been sort of implicit as our fastest-growing and most profitable and least capital-intensive business is our digital business, and the slower-growing business is the retail business. But the sale of holiday parks and the remodeling of our pub business just accelerates that.

Jordan Bender, Analyst

Great. And moving back to Brazil, it was fairly well telegraphed that market had a slow start and it's good to see you're seeing stabilization there. Curious on the adoption rate of the new wave of players to the Virtual Sports market. And we've all seen the estimates for the size and potential of Brazil, but is there any kind of aspirational number in terms of revenue that you could look to drive from that market?

Brooks Pierce, CEO

Yes. One of the key points I mentioned is the strong performance we have seen from localized content. Clearly, it is a market that is very passionate about soccer, and that has significantly influenced Virtual Sports. We experienced a remarkable uplift with one of our smaller customers. Just yesterday, we launched our product for one of our major customers in Brazil, and it yielded very positive results, although it's still early. What we need to accomplish in Brazil is to get our two largest customers, bet365 and Betano, on board, which we estimate hold about 40% of the market. If we include Entain with Sportingbet, we cover about half the market. However, we still need to engage the other half with Virtual Sports. This will require time to negotiate contracts and finalize integrations. We are collaborating with channel partners like Altenar and Kambi. The development of the market may take longer than we hope, but we remain highly optimistic based on the performance of our existing customers that Brazil will prove to be a very strong market for Virtual Sports.

Operator, Operator

Your next question comes from the line of Chad Beynon from Macquarie.

Chad Beynon, Analyst

Wanted to ask about just trends that you're seeing outside of the U.S. or North America. I think we all have a pretty good handle in terms of the consumer here, but as we look across the pond kind of what you're seeing from a recurring basis, whether it's in the U.K., Greece, or Italy. Brooks, I know you talked about some of the new product that's out there, so maybe it's a little harder to really kind of focus in on that. But any additional color just in terms of if you're seeing the consumer in those areas holding up through this period?

Brooks Pierce, CEO

Yes, absolutely. I know some operators in the U.K. have already shared their results. Entain, while not a retail customer for us, reported a 4% decline in retail. The positive aspect for us is that William Hill is experiencing the uplift we anticipated from Vantage terminals. However, on a year-over-year basis, our other two major customers, Betfred and Paddy Power, have experienced some softness. Overall, the market is up for us largely due to the increase from William Hill. As I mentioned earlier, the U.K. retail high street market appears somewhat challenged. The encouraging news is that we are seeing ongoing growth in iGaming from the U.K., and we are gradually capturing a larger market share quarter by quarter. In Greece, the market is relatively flat, but we are in the process of rolling out new terminals, so we expect that to boost our performance over the year. The same can be said for Italy, which is also flat. The only area where we are noticing a bit of softness is in the U.K. with customers who have had the Vantage terminal for more than a year. Thankfully, William Hill is performing strongly for us, so overall, the market is up for us.

Chad Beynon, Analyst

Great. And then, Lorne, last quarter, I believe it was, you made a comment just in terms of where you expected digital to be at the end of the year as a percentage of, I believe it was a percentage of EBITDA. Sounds like things are progressing pretty well, and all the initiatives continue to look good as we kind of get through the year. Has anything changed just in terms of how you view the contribution of EBITDA for the year?

Lorne Weil, Executive Chairman

No. I mean, I think the Interactive is really, so far, outperforming where we might have expected it to be at this point. As I mentioned in my remarks, the growth in North America or the United States of 90% year-over-year without the benefit of any new states is kind of pretty remarkable. And I think for all the reasons that Brooks said, we're starting to feel, and the data is supporting it, pretty good about where Virtuals is headed. So I think the combination of ultimately divesting the holiday park business and the tremendous performance we're seeing from digital, I would imagine that by the end of the year, we'll be at least at the level that we talked about last time, if not higher.

Brooks Pierce, CEO

Yes, I’d like to add that in the next quarter, we plan to provide some concrete data on Hybrid Dealer as it is currently in its scaling phase. We've observed strong engagement from major operators like Caesars, BetMGM, bet365, and Gamesys, as well as several Tier 2 operators through this Relax integration. There is a growing and consistent support for this offering. The focus now is on how we can reach as many customers as possible. The issue is not demand; rather, it’s about supply and ensuring we can deliver it to all potential customers. This will certainly enhance the percentage of our business contribution from digital in terms of EBITDA.

Operator, Operator

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

Josh Nichols, Analyst

Very nice step-up during the quarter in cash. I just wanted to talk a little bit about how should we be thinking about free cash flow generation going forward, just given the dynamics you have with increasing high-margin digital revenue, you have as well as CapEx-light model that you've been implementing in this new debt facility?

Lorne Weil, Executive Chairman

Yes. I mean, I think without getting into any specific number because we can try not to get involved in guidance per se, but certainly, all the components that would go into defining what our free cash flow are moving positively. EBITDA is obviously going up. The portion of EBITDA that has relatively little CapEx is also going up. As I mentioned before, we've got a little bit of increase in interest expense, but that will be far more than offset by a decline in CapEx, which we think, as I said earlier, is going to probably settle at around $25 million a year, which is way below where it is now. So I think our free cash flow conversion is going to steadily increase maybe in the sort of 30% of EBITDA range. There are going to be years when it's going to be up or down depending upon how working capital plays itself out. It always seems to be a pain at the end of the year, but I think we're feeling very positive about free cash flow in light of the deleveraging, in light of the reduction in CapEx, and obviously, the growth in the high-margin, high cash conversion digital part of our business.

Josh Nichols, Analyst

And then just last follow-up for me. Just there's a lot of irons in the fire, so to speak, particularly, I think, for the second half that provide some very interesting opportunities. If you were to pick what you're probably most excited about, I'm guessing, Hybrid Dealer. If you could just talk about, is the expectation there that as this ramps, that you think that the growth rate that, that business has seen is sustainable or could even possibly accelerate? Presumably, it's not a very big rate percentage of revenue today, but that should be increasing, given the opportunities that you've talked about over the last couple of quarters.

Brooks Pierce, CEO

Yes, I believe you addressed the question very well. That mirrors our feelings about Hybrid Dealer. We are really excited about the growth of our core iGaming business, where we are gaining market share and seeing phenomenal performance. Although it's still early for Hybrid Dealer, I want to highlight the BetMGM bonus wheel, which has been active for 14 months. Unlike iGaming products that tend to have a brief lifespan, this game has maintained and even improved its numbers over time. We are gaining a good mix of both larger and smaller operators, with some significant ones joining us soon, including FanDuel by the end of the year. This aspect is certainly what we are most enthusiastic about in terms of growth, starting from a relatively small base. By the end of the year, we will be able to provide guidance on the potential size of that business for us.

Operator, Operator

I will now turn the call back over to Mr. Weil for closing remarks.

Lorne Weil, Executive Chairman

Thank you, operator, and thank you, everyone, for joining us on our call. We know that Penn has their call starting at 9, so for those of you who are still on our call, we will now release you to jump on the Penn call. But thank you for your support, and we look forward to talking to you in a few months. Thanks.

Operator, Operator

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