Inspired Entertainment, Inc.

Good morning everyone and welcome to the Inspired Entertainment fourth quarter 2022 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, simply press star followed by the number one on your telephone keypad. Please note today's event is being recorded. Please refer to the company's safe harbor statement that appears in the fourth quarter 2022 earnings press release. which is also available in the Investors section of the company's website at www.inseinc.com. It is now my pleasure to turn the call over to Lorne Wheel, Executive Chairman. Please go ahead.

Thank you, Operator. Good morning, everyone. Thank you for joining our year-end conference call. Here with me on the call, as usual, are Brooks Pierce, who, since our last call, has very deservedly head chief executive added to his president's title. I know you all joined me in congratulating Brooks on this great milestone. We also have our CFO, Stuart Baker, who, as you'll see in a moment, seems to have more than regained full strength since his illness some time ago. We're also joined for the first time this morning by Eric Herrera, an extremely talented finance and development executive who recently rejoined Inspired is VP of Corporate Development. Eric was a key member of our finance and corporate development team at Scientific Games for many years and later a key part of our SPAC team that undertook the merger with Inspired around six years ago. Incidentally, Brooks and Eric are making this call from the Roth Conference in California. So if any of our listeners are attending Roth, please feel free to track them down. I should also mention that after many years as the chief investor relations executive of Inspired, and before that, Scientific Games, Amy Remy has recently departed to pursue a really great and well-deserved opportunity elsewhere in the gaming world. Rather than try to replace Amy, we've chosen instead to retain Jacques Cornet and his gaming team at ICR, a firm we are quite familiar with and highly confident in. One of the ICR principals did great work for us at Scientific Games while he was head of equity capital markets at Bear Stearns. And for the last few years, ICR has very successfully handled investor relations for the New York Stock Exchange listed company Technoglass, an organization with which I have had a close non-executive affiliation for several years. So welcome, Eric and Jacques. Congratulations again to Brooks. and to your continued great health, Stuart. As anticipated for some time, we reached the $100 million EBITDA milestone in 2022, far ahead of 2021 by any measure. As has been our practice in the past, we don't provide official forward-looking guidance, but the research community is generally pretty accurate in its consensus. And as 23 is unfolding so far, we don't expect that the 2022 milestone will stand for much longer. More important than the numbers themselves, our overarching strategy is playing out as well as we could have planned. Our combined digital businesses grew to account for 53% of our EBITDA in the fourth quarter of 2022, up from 46% a year earlier, driving us inexorably toward a higher growth, higher margin, less capital intensive business model. At the same time, our strategy of moving our retail business in the right direction, excuse me, in the light direction is taking hold as well. During the fourth quarter, we signed contracts with Betfred and Paddy Power to deliver a combined 7,000 of our brand new Vantage cabinets through 2023. As we have explained previously, the step down in EBITDA from these two major accounts occasioned by our capital light strategy and pretty much run its course by the end of 2022 because the new vantage cabinet has been showing a 13 wind per day uplift in field trials we can actually anticipate as the rollout proceeds through 2023 we will in fact see an acceleration in ebada from these major accounts notwithstanding the very positive capital impact About a month ago, it seemed like half of Inspired Entertainment attended the annual ICE show in London. I know that Stuart has been dreading receiving the bill for this, but I'd been attending and exhibiting at this show for roughly 20 years, and the response to the product range on our booth and the demos provided by our team were like nothing I've ever seen. Without doubt, the star of the show was the new aforementioned Vantage cabinet, both the vetting shop version discussed just now, and in particular a version we call Vantage Cat C, targeted at the arcade and pub markets. In almost no time since its introduction, we've built a backlog of close to 1,000 new Vantage cabinets for the arcade, and is also known in the UK adult gaming center market. Our entry into this business came as a result of our Novomatic acquisition a couple of years ago, and the revenue and profitability have been quietly but very rapidly accelerating since. As the number of traditional betting shops declined in 2019 and 2020 in response to the reduction in maximum stakes that many of you will recall we discussed ad nauseum at the time, the number of arcades has actually grown sharply in tandem, helping to drive the growth in our overall gaming business we're now experiencing. So this seems to be one of those very rare cases where the law of unintended consequences surprises us with an unintended dividend. Based on hugely positive customer response, we expect the Vantage Cat C will have a comparable impact on our pub business. Our leisure sector overall had a very successful 2022, far ahead of 2021. But as you can see in their press release, there was a hiccup in the fourth quarter. Most of this decline was attributable to currency movements, but there was some weakness in the business itself, mostly timing-related, that Brooks will get into in greater detail in a moment. But for now, let me say that as we begin to deliver the Vantage Cabinet to the pub customer base, we confidently expect to see market share gain, a more rapid conversion to an all-digital estate, and perhaps most importantly, higher revenue per day all of which will combine to restore the leisure business to a more appropriate level of profitability. The performance of our digital businesses more or less speaks for itself. The EBITDA for the virtual sports and interactive businesses combined was $15.6 million in the fourth quarter of 2022, 40% above the level of the fourth quarter of 2021. The virtual sports business accelerated dramatically during the depths of COVID, which many of us will remember, when both live sports and live gaming venues were shut down across Europe, leaving online virtual sports as the only game in town, so to speak. The general thinking at that time was that once both live sports and live venues came back on stream, the virtual's business would revert to its prior level. But not only did it not retreat to pre-COVID levels, it continued to accelerate as illustrated by the most recent fourth quarter numbers, which saw 36% year-to-year growth in revenue and 56% growth measured in functional currency. Underlying this amazing trajectory has been a combination of organic growth with existing customers, new geographies, new customers, and very effective new product development. Likewise, the interactive business defied predictions that it would retreat in a post-COVID world and indeed has lately begun to re-accelerate, posting EBITDA growth of 21% in the fourth quarter, essentially all of it coming in North America, another aspect of our overall strategy that seems to be working well. In the longer term, interactive growth will be driven predominantly by the coming online of new jurisdictions. But in the shorter term, there are several important drivers to our own interactive business. We recently completed our integration with FanDuel and expect to go live by the end of March, an extremely important development given FanDuel's strength in the IEA market. Because the timing of our entry into the Pennsylvania market lagged our other states, we feel we still have significant growing room left in Pennsylvania. And lastly, we have completed some very important enhancements to our platform that should drive growth in all markets. Let me lastly say a few words about our lottery activities. Results in our flagship operation in the Dominican Republic are continuing to run well ahead of expectation. With a population of 12 million, 2,500 retail locations, and revenues well into nine figures, our Dominican Republic lottery operation is comparable in size and scope to many of the state lotteries in the United States and around the world. Since taking over this operation about a year ago, we have been running the retail network and at the same time working on the development of the iLottery platform, and we expect that this will launch before the end of March. There are three very important benefits to this launch. It will enhance the profitability of the DR operation itself. It will give us a captive location to test, refine, and showcase our iLottery content. And it will give us an iLottery platform that we can use worldwide. And finally, a word on our stock repurchase program. In the fourth quarter, we purchased about 40,000 shares at an average price of $9,000. And since the inception of the program, we have repurchased a little over 1 million shares at an average price of $9.79. We have significant room remaining in our repurchase authorization, and we will continue to monitor this carefully. And with that, I'll hand it over to Brooks.

Okay, thank you, Lauren. And thank you for the congratulations on the title change. But more importantly, my sincere thanks for the guidance and mentorship you have given me over the last 30 years now. Now into the business itself and our performance in quarter four for the full year. And as I normally do, I'll dive a little deeper into each segment and provide perspective on what we're seeing ahead for quarter one in 2023. business overall continues to perform extremely well and we're encouraged by the results and certainly the momentum that's carrying into 2023 although we report in four segments we view the business a bit more simplistically into the digital business virtual sports and interactive and the land-based business gaming which includes lottery and leisure the digital business is characterized by higher growth rates higher margins lower capital intensity, and increasing opportunities for growth, particularly in North America. Digital now represent more than 50% of EBITDA. The land-based business is lighter from a capex standpoint than it has been in the past. This business is characterized by recurring revenues and growth coming from increasing the cash box of our installed base by leveraging our content capabilities across various types of venues, including bedding shops, pubs, lottery, retail, adult gaming centers, holiday parks, motorway service centers, and bingo halls. The land-based business also has tremendous operating synergies. We're in the midst of consolidating the service organizations across our retail business in the UK. When we acquired Novomatic Technology Business in the UK a few years ago, we kept the two field organizations separate to start the process. But we've now embarked on a consolidation plan that will generate significant savings starting in the second half of this year. Lauren constantly reminds us of the Jack Welsh adage that anybody can grow if they don't have to worry about making money, and anybody can make money if they don't have to grow. But the true test of a successful company is its ability to do both. We are 110% committed to doing both across the enterprise. Within digital, our virtual sports business continues to deliver record results with full-year 2022 revenue up 71% on a functional currency basis and EBITDA up 83% on a functional currency basis year-on-year. The mix between online and retail virtual sports now sits at roughly 80% online and 20% retail, but both are showing growth across multiple product lines and across multiple geographies, including the U.K., Italy, Greece, and Morocco. These trends are continuing in the first quarter. And in addition, we have a number of product enhancements and launches like our home run shootout game scheduled in the end of the first quarter, the beginning of the second quarter that we believe will continue to contribute to these record results. We're also encouraged that the progress we're making in our North American virtual sports business as Ontario is now a significant market for us. Our two U.S. lottery customers in Pennsylvania and D.C. are performing well. and we're building a pipeline of additional lottery and sports betting operators opportunities in states that we expect to launch later this year and into 2024. We're very encouraged by the progress we're making on the other side of our digital business, the interactive or iGaming part. Interactive revenue grew 24% on a functional currency basis in Q4 compared to Q4 2021. This growth comes with Inspired still not live yet, as Lauren mentioned, with FanDuel, who are approximately 20% of the USI gaming market. We are currently targeting being live with them either towards the end of Q1 or more likely early in Q2. This growth is driven by improved content, consistent delivery of games, roadmaps, faster integrations with new customers, and a greatly expanded account management team with new additions in both North America and Europe. We're very excited about some of our titles coming out over the next few quarters, including a licensed Terminator game that I've seen that looks amazing, and it's eagerly anticipated by our customers. As Lorne mentioned, our booth at ICE was a capacity throughout, and the positive feedback we received from our customers on new games and new products confirms our belief that this business segment also has tremendous momentum coming into 2023. Moving on to the gaming side, Q4 was a quarter of significant achievement for us as we successfully delivered our largest North American gaming machine sale to Western Canada Lottery Corporation of 820 Valor terminals. This was achieved through a great partnership with our customer in Saskatchewan under some very difficult weather and operating conditions, and we're extremely proud of the whole group that delivered this important project. Q4 was also significant due to the contract signed with Bedfred and Paddy Power in the quarter on the backs of the successful trial of the Vantage cabinets, which, as Lorne mentioned, produced a double-digit uplift in the cash box of the trial machines. We'll be very busy throughout 2023 delivering these approximately 7,000 machines across the estates of both customers, a not insignificant operational and logistics challenge. Lauren covered thoroughly in his remarks about the pipeline of Vantage cabinets that we'll be delivering to the AGC market in 2023. But these terminals also come with the tail of content fees beyond the initial sale, which has grown tremendously over the last two years and is building a base going forward as our installed base gets bigger and bigger. Looking forward, we're in the early stages of trials with two customers in North America. That, if successful, will build a larger footprint for our North American gaming machine business. As Lauren mentioned earlier, our leisure business, and more specifically the pub segment, had a challenging fourth quarter. While this continues to be a key strategic market for us, we experienced a rare, and we confidently believe temporary, loss of market share in 2022, the impact of which peaked in the fourth quarter. At the same time, we signed a very strategic new Holiday Parks customer, which by mid-year should generate equivalent earnings. We'll roll out the Vantage product throughout the pub market, driving both regained machine share and higher per machine income, and therefore we feel confident that we should end the year nicely ahead in leisure. Loren covered the lottery activities in detail in his remarks, and I share his enthusiasm for this vertical as it really is in our DNA. Many of our biggest customers around the world, such as OPAP, CECL, LATAMATICA, and the Morocco National Lottery are operators that we've had a ton of experience with in this vertical throughout our careers. We're starting to see momentum build worldwide, but particularly in North America for our iLottery content, our virtual sports, and eventually iLottery and retail lottery platforms based on our work in the DR, which we believe will be transferable to other lottery jurisdictions worldwide. With that, I'll hand it over to Stuart for some further remarks.