Inspired Entertainment, Inc.

Good evening, everyone, and welcome to the Inspired Entertainment third quarter 2023 conference call. At this time, 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'd like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the one once again. Please note today's event is being recorded. Please refer to the company's safe harbour statement that appears in the third quarter 2023 earnings press release. which is also available in the investor section of the company's website at www.imseinc.com. This safe harvest 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 law 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 over to Lorne Wheel, the company's executive chairman.

Mr. Wheel, please go ahead. Thank you, operator. Good evening, everyone, and thank you for joining our somewhat delayed third quarter conference call. With us this evening, as usual, is our CEO, Brooks Pierce, and joining us for the first time is our interim CFO, Marilyn Jensen. Marilyn has done an extraordinary job overseeing the accounting work that's taken place in the last three months, and for those of you who may not be familiar with Marilyn's background, although I think we've made it public in a few different places. She's a 10-year veteran of the Big Four accounting world. She's a former senior VP finance of IGT, and she is a Wharton MBA with a concentration in accounting. And thanks to her work and the work of her team, we today filed an amended 10-K for 2022, amended 10-Ks for the first and second quarters of 2023, and the delayed 10-Q for the third quarter of 2023. And with these filings, we are in full compliance with NASDAQ and with our lender group. This follows a three-month process during which our internal organization was augmented by enormous outside accounting and audit resources provided by one of the most highly regarded and prestigious firms in the public accounting industry. Indeed, it's not an overstatement, I think, to say that these are the most fully vetted financial statements I have encountered in my roughly 50 years of working in the public company arena. As mentioned in the press release, the first half of 2023 was unchanged from what had been previously reported last year, with a million dollar first quarter downward adjustment offset by a similar upward adjustment in the second quarter. In the full year 2022 EBITDA was adjusted downward by about a half a percent from 99.6 million to 99.0 million. EBITDA on the third quarter of 2023 was 26.7 million, slightly behind the third quarter of 2022. For a variety of reasons, which I'll clarify as I review the individual businesses in a moment, we think that 26.7 million very meaningfully understates the earnings power of the business at this time. Given that the fourth quarter is by now in the rearview mirror, given that we're in February, I think I can say that we expect the fourth quarter to be in line with consensus and excluding the roughly $2 million impact of our fourth quarter computer systems hack to be nicely ahead of both consensus and Q4 2022. Now let me take a look at each of the businesses themselves. The virtual sports business continues to be as amazing a business as I've seen in all my years. Super high margins, relatively low capital intensity, significant barriers to entry, which we have further strengthened with the NFL and NBA licenses, and tremendous long-term growth potential. Following a period of extraordinary growth that was driven by the addition of several new territories, and we've talked about those a number of times in the past, and some great new products. We've been on a short-term plateau for a few quarters, and indeed, we saw a modest year-to-year EBITDA decline in the third quarter, which, as mentioned in the press release, was more than entirely occasioned by our major customer deliberately and effectively pruning the user base, a process we think has run its course at this point. In a moment, Brooks will talk in some detail about why we think we're about to embark on a second exponential growth phase driven by new products and, more importantly, huge new geographies that operate in both the gaming and the lottery spaces. While growth in the virtual sports business has been in temporary pause, the other part of our digital business, Interactive, has validated the wisdom of the major investments we've been committing some time to content and platform development. Revenue in EBITDA in the third quarter grew 37% and 68% respectively, with EBITDA margins expanding from 53% to 64%. It's important to recognize that this growth has been driven by only a small handful of iGaming jurisdictions in North America. and we're confident that the inevitable addition of new states and new provinces will further accelerate this growth. Taken together, the EBITDA of our combined virtual sports and interactive digital businesses accounted for 58% of our overall EBITDA in the first nine months of 2023, up from about 50% in 2022. Here again, Brooks will add significantly more color in a moment. The most important development to report within our retail business is the phenomenal performance of the Vantage cabinet in both the bedding shop and pub sectors. In a moment, Brooks will review this subject in some detail, but along with the success of our asset light strategy, this cabinet and its associated content appears clearly to be a game changer in our recurring revenue retail businesses. Notwithstanding the success of the new cabinet, The EBITDA from our combined retail businesses declined modestly from 2022 to 2023, with the overall decline split about evenly between gaming and leisure. Three distinct factors contributed to this decline. The minor loss of EBITDA attendant to the asset light strategy, which we believe will be more than made up for by the performance of the Vantage cabinet. the movement of significant one-time product sales out of the third quarter, and very significant wage increases in the holiday park business due to changes in the UK regulatory environment. Regarding the latter, we believe we have devised a restructuring program designed to recapture this lost income, which we hope to be able to discuss in our next conference call. Taking all these factors into account, we would expect to see re-accelerating growth in our retail businesses as we move through the fourth quarter and into 2024. And with that, I'll turn things over to Brooks.

Okay, thank you, Lorne. And thanks to all of you for joining the third quarter call. And as I usually do, I'll try to add some color and detail to Lorne's overarching comments to give some further clarity on the business progress as we see it and what we're working on in terms of future developments. I certainly echo Lauren's statement about the efforts put forth by both Marilyn and the entire finance team on the accounting work it's done to take us to get to today. And frankly, I want to give thanks to the whole INSPIRED team who's endured this process along with other challenges, including the hack to our IT systems and the recovery from that in such a professional way. As we've mentioned in the press release, the hack will have penalized us by approximately $2 million, primarily through the reduction in our ability to deliver games. the slowdown in integrations and other productivity reductions. Good news is we feel like the future is bright for Inspired, and that's what the team and I are laser focused on. First, let me give you some details on the virtual sports business alongside Lauren's comments. I agree completely that it is an amazing business with all the characteristics Lauren mentioned, but the most important of which is the fact that I feel like we're in the first quarter of the game in this business. The main drivers of the growth in the business are new products, licensed products and new geographies and we're in the very early stages in each of those categories. We've launched the NFL license game with our largest customer and we're seeing exactly what we hoped with the NFL game growing in revenue weekly without cannibalizing our existing NFL alumni game. First half of 24 we'll see the game launched across additional North American operators like BetMGM and Rush Street and we hope to add other operators as we go through the year. And we're also seeing more interest from European and Latin American operators for this product. And we'll be rolling it out to these customers also over the course of 24. As always, it takes some time to do the integrations and coordinate promotions with operators, particularly in some of the newer virtual sports markets like North America. But we are more confident than ever that there's a robust market for this product and that licensed brands will drive incremental play. We're very excited to have signed a license with the NBA as well, and it will be our first but certainly not our last foray into the archived version of virtual sports, wherein footage of previous NBA games will be constructed into a virtual sports format. And we're confident that this will resonate with the vast NBA worldwide brand and many of the markets we serve. We expect to launch this product in the second quarter of 2024 with our large customer in Greece. who have approximately 3,000 retail locations, as well as a major online presence. And we're already working with them, OPAP, and the NBA to do a major marketing and promotion launch for this product. And importantly, it will be an incremental channel, not replace an existing virtual channel in Greece. We're also down the path on our hockey game, as we've talked about in the past, and hope to launch that. Also in 2024 and expect that will be a very popular new game in key markets like the US, Canada and Nordic and Eastern European areas. So clearly you can tell we're very bullish on both licensed brands like the NFL and NBA and the new products supporting these that will be rolling out this year. In terms of additional geographies besides North America, that's as I said in the very early stages, We're obviously incredibly excited about the opportunity we see in Latin America and particularly in Brazil. We're fortunate to have virtual sports specifically included in the recent sports betting law that passed in Brazil. And we've been working in that market in advance for months to help build interest in our unique offerings. As most of you will know, soccer or football, depending on where you're from, is the biggest virtual sport for Inspired and represents more than 75% of our business currently. And Brazil is an incredibly passionate population when it comes to this sport. And as we've seen in other markets like Greece, Italy, Turkey, and Morocco, having a passionate fan base for a sport is a great precursor for the success of virtual sports in that market. So we'll have a team down in Brazil actually next week for several meetings with operators. And we believe that Brazil will be a market for our products, including iGaming alongside virtual sports. that would be much like our other key markets of UK, North America, Greece, and Italy that will be very strong for our digital businesses. As Lorne mentioned in his remarks, it's not out of the ordinary for a business segment that has seen the growth that we've seen out of virtual sports to experience a period of moderating growth, and ours was exacerbated by the change in policy by our biggest customer with their players. But we are confident that the strategy of additional licensed sports in either new or newly launched territories will propel sustainable growth for this segment going forward. Moving on to the interactive segment of the digital business has shown, as Lauren mentioned, incredible growth throughout 2023 with revenue growth in the third quarter of 38%. And this segment really continues to click on all cylinders. This is a result of improved games and quantity of games released alongside dedicated account management to ensure that our games are positioned appropriately on our operator sites. We have a roadmap of content in the first half of 24 that frankly looks like the strongest roadmap we've ever had for all of our key markets, including UK, North America, Greece, Italy, and going forward in Latin America and specifically Brazil. Additionally, we're in the process of building our next game studio, whose primary focus will be bespoke content for the North American market. To date, we've supported the North American market from our UK studios, and considering that, we've had some very strong results. But we see new states coming on in iGaming and new opportunities in our retail business in North America and think a dedicated studio will accelerate our online and retail growth in this key market. Our omni-channel strategy has been validated in the UK, in Greece in particular, as we leverage our retail game content alongside our online content and we're gaining share in each of those markets and we'll be looking to replicate that success in North America. Many of you will have seen the recent announcement about the stakes limits in the UK being adjusted to two pounds for those under 25 years old and five pounds for those over 25 years old. We've been an active participant in these discussions and have fully prepared for this outcome. that will start in the fall. We expect it to have a very modest impact. And our game designers have been planning for this for a long time. And frankly, we feel that this is probably a good thing for the market long term. Many of you will have seen a product that we introduced at G2E, a revolutionary product, frankly, that we call Hybrid Dealer. And we recently showed it even more extensively at ICE in London. So we've now soft launched that with BetMGM and have worked through all the technical and regulatory steps alongside them. And they are planning a big marketing push now that the Super Bowl is behind them. And we look forward to reporting on that in future calls. We also expect to go live with Roulette in the second quarter of 24 and expect that this will be the larger of the product segments and will apply to a broader set of our customer base. Our booth at ICE was filled with operators wanting to see this product, and our pipeline of potential customers is extremely full, and we'll be working throughout 2024 to be delivering this product segment to as many key operator customers as possible. Overall, we feel like we've positioned the digital segments of our business, as Lauren talked about, for continuing along this great growth trajectory. Moving over to the retail businesses. whose characteristics are also, you know, our lower growth and stable businesses with recurring revenues streams based largely on our participation in the cash bucks. But we also have a component of one-time sales in that business that can move from quarter to quarter, impacting performance when looking at the narrow lens of one quarter. And that's what we saw in Q3 of 23 with some sales moving into the fourth quarter. Biggest news in these businesses is the phenomenal success of the Vantage Cabinet. and that we are much further down the road in the replacement and asset light strategy we are driving in these segments. We've completed the full installation of Vantage cabinets in both Betfred and Patty Power shops, and the Vantage cabinet continues to produce an uplift of close to 11% for these operators over the cabinets they replaced. We've now installed over 1,200 Vantage cabinets in our pubs business, which represents about 19% of our estate, And we're seeing actually a greater uplift with daily cash box in the pub segment up 21% versus the machines they replaced. We're now starting to place these cabinets in other venues such as AGCs, motorway services, and bingo venues. On the sales front in North America, we've seen improved performance in our terminals in Illinois with a brand new game pack that's proving to be very successful. And we're working with several key prospects in the Canadian market and we'll look to report on that in future quarters. Uh, as Lauren mentioned, we certainly have some cost pressures in the holiday park segment of the leisure business that we have plans to mitigate and are working diligently across the entire business to find economies and efficiency improvements to run our business segments more profitably. And we'll, we'll report on that progress on that front and subsequent courts. So even though we haven't had formal calls due to the restatement, we've obviously been very hard at work building what we think is a growing, diverse, and profitable business. So with that, I'll hand it back over to Lorne for any closing remarks before we open up the Q&A. Thanks, Brooks.