Inspired Entertainment, Inc.

Good morning, everyone, and welcome to the Inspired Entertainment first quarter 2024 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. If you would like to withdraw your question, press star one again. Please note, today's event is being recorded. please refer to the company's safe harbor statement that appears in the first quarter 2024 earnings press release, which is also available in the investor section of the company's website at www.insee.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 the management's current expectations or beliefs and are subject to risk, uncertainties, and changes in circumstances. In addition, please note that the company will discuss both GOP and non-GOP financial measures. Our reconciliation is included in the earnings press release. With that completed, I would now like to turn the conference call over to Loren Will, the company's executive chairman. Mr. Will, please go ahead.

Thank you, operator. Good morning, everybody, and thank you for joining our first quarter conference call. Here with me are CEO Brooks Pierce, who will provide prepared remarks in a few moments, as well as Marilyn Jensen and Eric Herrera, who are available for Q&A. As we had more or less previewed a few weeks ago in our year-end conference call, the first quarter was, to put it mildly, a metaphor for Murphy's Law. To date, we've spent well in excess of $10 million in accounting, audit, and legal expenses in connection with the accounting restatement, much of which was below the line, but a meaningful proportion impacted EBITDA, and of course, 100% of it impacted cash. We had other significant one-time expenses in the first quarter, and although our equipment sale backlog is currently at record levels, delivery dates have moved into the second half of the year. Similarly, during the quarter, we continue to spend significantly for recurring revenue growth initiatives, which will have some impact in the second quarter, but which we are confident will continue to grow strongly throughout the year. But before elaborating further on these and other developments, let me preface these remarks by saying that we are anticipating a dramatic improvement and EBITDA in the second quarter. The interactive business recorded another very strong quarter in Q1, and we see no reason for this growth to decelerate, especially given the opening of important new markets and the steady introduction of new products. The pullback in our virtuals business that we have been experiencing has run its course, and we have begun to see a resumption of growth that will be driven further by the new NBA and NFL games, as well as new markets. In the hybrid dealer area, we're live with one product, the game show wheel, with a single customer in a single market. And we're seeing strong, steady growth trajectory, which augurs well for the eventual expansion into a broader customer base and many more markets around the world. Very importantly, from a product point of view, We will be launching the hybrid dealer roulette game in the summer. Roulette is by a significant margin the largest category in the live dealer sector and one of the very largest in the entire online gaming industry. And lastly, we're putting the finishing touches on some vantage-driven growth initiatives in our gaming business, which we believe will add significantly to EBITDA, certainly beginning in 2025. again with some possible positive impact in the fourth quarter of this year. In our last conference call, Brooks referenced our plan to generate significant margin expansion through an operational restructuring that is currently underway and which will generate several points of company-wide margin improvement, again mostly impacting 2025 and beyond, but the possibility of some impact yet in Q4 this year. In a nutshell, our plan is to separate the holiday park business, which is essentially a family entertainment-oriented business driven largely by amusement equipment, think Dave and Buster's, from the other parts of the leisure business, from the pub, motorway service, arcade, and bingo businesses, whose business models are identical to that of our gaming business, but addressing different retail environments. So the functional elements of product engineering, manufacturing, platform and content development, server hosting and field service operations overlap almost perfectly, providing potentially huge benefits to consolidation. As we complete this consolidation, we can then begin to consider strategic alternatives for the holiday park business. In light of the foregoing, we're confident, as I said a moment ago, that we're seeing a very significant increase in EBITDA from the first to the second quarter of this year, perhaps on the order of give or take 50% sequential increase. That will give us a strong platform from which to move into the back half of the year. And with that, I'll hand it over to Brooks.

Okay. Thank you, Lorne. And I'll try to expand on several of the topics you covered in your remarks and relay our progress on some of the key initiatives we talked about in our year-end call that, ironically, only a month or so ago. The combined digital businesses, interactive and virtual sports, contributed more than 60% of our EBITDA in the first quarter, but are relatively flat compared to prior year, but with the mix changing to more contribution, from the interactive segment, but with most of the key growth drivers for virtual sports just starting to launch and with plans to accelerate throughout the year. The momentum we have been discussing in the interactive segment continued through the first quarter with revenue being up 31% year over year on a functional currency basis and EBITDA being up 38% on the same basis. Even with these phenomenal growth rates, the numbers continue to grow with April being our second largest month on record and just last week, the highest revenue week we have ever had. This is a testimony to the strategy and execution of the interactive team, including our game design teams, as well as the commercial teams and is very broad based across multiple tiers of customers in multiple geographies. Just for an example, we grew our market share in the UK in 2023 by 40% and are at our highest levels ever. We're rapidly expanding in more geographies, particularly in Latin America, as we've discussed in the past, and are confident of this part of the business to continue to thrive. We're also excited about the early momentum for the hybrid dealer product in New Jersey, and we'll look to expand to our second state in the second quarter and to launch our roulette game by the end of second quarter, the beginning of the third quarter, and then to deliver the first game to our next customer, Caesars. As we have discussed, Over the last few quarters on virtual sports, we've been impacted by a key customer modifying their player base to focus on players with sustainable value for them, and this has had an impact on our business. There is a silver lining here, however, as we've seen the stabilization of the virtuals business at these levels for the last few quarters and saw the remainder of our online virtuals business grow 27% year over year. We just went live today, actually yesterday, and OPAP with our NBA licensed archive footage product with strong marketing support and we look forward to its success as OPAP has proven to be a very strong retailer with virtual's growth in their retail footprint growing more than 20% last year. We continue to roll out our latest NFL game to more customers and we're seeing growth there, but I just saw the first few clips from our latest motion capture football shoot and it's honestly amazing how much this technology has improved over the last few years. We did full motion capture shoots for both football and hockey, and both products will be live later this year, and they'll set the standard from a visual perspective in the virtual sports business. As I said, we're confident this will drive player engagement and revenue and EBITDA growth for Inspired and our operator customers. Gaming segment headwinds are primarily due to a couple of key items. First is the loss of a service contract for SSBTs. that we were providing to a customer that has decided to bring that service in-house. Second factor is due to a delayed rollout of our Advantage Cabinet with a key customer who's not reaping the benefits yet of the double-digit growth we're seeing with our other customers in the sector. We're hopeful that this will be mitigated by year-end and will be a significant EBITDA contributor starting in Q4 this year, but fully realized in 2025. We announced the sale of 720 Valor terminals to WCLC that we will deliver by the end of the year, which will be a big driver of the improvement in gaming performance by year end. And we are seeing improved performance and good take up on our game subscriptions to our Illinois customers. Lastly, our backlog of equipment sales in the AGC segment in the UK is robust and will help drive improvement in Q2 and throughout the rest of the year. Q1 is the seasonally lowest quarter for the holiday park segment, and we're gearing up for growing that part of the leisure business in Q2 and peaking by Q3. The pubs business continues to perform well with Advantage Cabinet, and as most of our revenue in this part of leisure is in weekly rentals, we are aggressively installing Advantage Cabinets in Q2 to reach our targeted install base as we move into the second half of the year. Our MSA business, or Motorway Services, has been challenged by extensive roadworks in the UK impacting football in that part of the business, but we hope to see that improve also by the second half of the year. And finally, as Lorne mentioned, we're laser focused on our cost reduction plan to reach our target of 40% EBITDA margins, and a number of these plans are being implemented right now, but the benefit of those is not expected to contribute until later in the year and will be offset to some degree by the cost to implement these changes but we are confident that these necessary steps will be actioned and contribute to improved margins in cash flow in the second half of the year. And with that, I'll hand it back over to Lorne for Q&A.