This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good morning, everyone, and welcome to the Inspired Entertainment second quarter 2024 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. If you would like to ask a question at that time, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star one again. Please note that today's event is being recorded. Please refer to the company's safe harbor statement that appears in the second quarter 2024 earnings press release, which is also available in the investor 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 and are subject to risk, uncertainties, and changing 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 Wheel, the company's executive chairman. Mr. Wheel, please go ahead.
Wheel
Thank you, operator. Good morning, and thanks for tuning in to our second quarter conference call. Joining me this morning are CEO Brooks Pierce, CFO Marilyn Jensen, and VP of Corporate Development Eric Carrera. I'll start with an overview to try and frame how we're thinking about the second quarter, and then turn it over to Brooks to elaborate on a number of very interesting and exciting initiatives that will be driving growth in the second half of this year and beyond. In our first quarter conference call, we shared that we thought our second quarter EBITDA would grow sequentially by at least 50% from the first quarter. And we ended up the quarter about 56.5% ahead, which I think is ahead of consensus as well. It reflects the fact that pretty much all areas of the business are hitting on eight cylinders. The interactive business was once again the star of the show. with revenue and EBITDA 40% and 69% respectively ahead of Q2 2023, meaningfully outpacing the growth in the market. Market share gains were driven by new customers, new geographies, and most importantly, the launch of new products. In a moment, Brooks will discuss in some detail our hybrid dealer initiative, which we forecast will grow to become by far the largest component of our interactive portfolio as we add new products to the category, broaden our customer base, and expand into new geographies throughout the world, again, which Brooks will discuss in a moment. In terms of profitability and cash flow, virtual sports continues to be our highest performing business with EBITDA margins in excess of 80% and cash conversion even higher. I don't think I have ever seen another business perform at these levels in all my years of doing this. Following a lengthy period of sustained growth, revenues recently have been treading water due in part to the absence of meaningful product and geographic expansion, along with a user-based optimization exercise, which we have discussed previously. But as Brooks will elaborate upon in a moment, and as mentioned in the press release, We anticipate that revenue and EBITDA in the second half of this year will exceed the first half as we begin to see the impact of recent product and geographic expansion. There were so many one-time or non-recurring events in our core gaming business in the second quarter of both 23 and 24, it's nearly impossible to understand the strong underlying momentum in this part of the business. Two of our three largest betting shop operators, Betfred and Paddy Power, are showing strong year-to-year growth, a pattern we now expect to see replicated with William Hill as we begin to deliver the first of 5,000 new Vantage cabinets in the fourth quarter of this year. So, this is an important growth driver for 2025. Similarly, the injection of significantly more Vantage cabinets into the top tier pubs sets in motion a cascading replacement process throughout the entire pub estate that will be an important driver of revenue in EBITDA as well. Lastly, I should mention that our plan to rectify the below average profitability of our holiday park business is well on the way to fruition, and hopefully we will have more to discuss in the coming weeks. As mentioned previously, this is the key component of our plan to get our overall EBITDA margins comfortably into the 40s. And with that, I'll hand it over to Brooks.
William Hill
Okay, thank you, Lorne. And I'll give a little bit more color to the individual business segments and some perspective on the second half of 2024 and the drivers for the business going into 2025. The interactive segment continued its strong growth trajectory and increasing revenue by 40% year-over-year and 69%. adjusted EBITDA growth year-over-year and sequential quarter-over-quarter growth in revenue of 16% and adjusted EBITDA growth of 39% showing the operating leverage that exists in this segment of the business. The momentum is carried through with July being our highest revenue in history and the first week of August actually being the highest individual revenue week we've ever recorded. There are several factors that are leading to this performance, including a great content roadmap with consistent delivery of high-quality games, the addition of key customers in markets, and our ability to gain market share in mature markets like the UK. So let me give some examples of what I'm talking about. We introduced 40% more games in Q2 versus Q1, with many exclusive games with key customers in the quarter. We launched FanDuel in Connecticut and now serve 100% of that market and have added Fanatics and Parks in key states and serve above 90% of customers in the three biggest markets of New Jersey, Pennsylvania, and Michigan. And we expect to go live in both West Virginia and Delaware before the end of the year. We reached 8% market share for slots in the UK, the highest we've ever been and quadruple what we were just several years ago. and grew our blended share of table games and slots in the UK from 5.4% a year ago to 7% in Q2, representing 30% growth in a very mature market. The largest component of this increase is due to the success of our content across the Flutter Group. We've also recently introduced our first progressive game in the North American market with Rush Street and expect to roll out more of our content in this key game mechanic to all of our customers in the North American market. We're encouraged by the performance of this segment, but still see plenty of runway for growth opportunities, both in product innovation and performance, and key new geographies like Brazil and South Africa. So let's talk about hybrid dealer. So hybrid dealer, which we'll report in the interactive segment, is really starting to hit its stride after its full launch in New Jersey in Q1. In New Jersey, the monthly turnover has doubled since going live and the number of active players has increased more than 50% in that period, and repeat players is the highest we've seen since launch. We think that proves that this product appeals across a broad spectrum of the player base and is sticky, and BetMGM has been great in supporting this with marketing and great placement on the site. We went live with our second state with BetMGM in Michigan, and although it's still early days, the results have been terrific. We're seeing active players and turnover in Michigan that's significantly higher than what we saw in New Jersey, and the average stakes are 40% larger in Michigan than what we're seeing in New Jersey. Interestingly, we're seeing increased play over time with Bonus City, whereas most slot games tend to drop off after launch and over time. Needless to say, it's early days in both markets, but we're very encouraged by the results we are seeing. As we've discussed on previous calls, we fully expect Roulette to be even more successful than our wheel games, And we'll be launching multiple versions of this game to customers in North America and the UK and the rest of the world over the next couple of quarters. We'll launch a generic roulette game, a double zero roulette game, a bespoke branded roulette game, and an area we're super excited about with some unique side bet games that only can be created through the hybrid dealer technology we deploy. We expect that the rest of 2024 will be about getting these customers and products live. and believe that this part of the interactive segment will be a meaningful contributor to the company in 2025. The other segment of our digital business, virtual sports, continue to see some headwinds, primarily with our largest customer and delays and going live with some other customers with some of our latest content, including the NBA and NFL. We plan to have these products in a number of customers throughout Q3 and Q4 and in the North American, UK, and Brazil markets and expect that to improve performance in the second half of the year versus the first half of the year in terms of both revenue and EBITDA contribution. We recently launched our eSports virtual game with Betano and have seen very positive uptake with turnover approaching the same levels that we would see on a single stream of soccer. We plan to roll this out to additional markets and see this as a potential new source of attracting a different type of player than perhaps we've seen in the past. We remain bullish on virtual sports even with this small dip in performance. Moving over to the land-based businesses, so the gaming segment included two significant events in Q2 with the signing of a new service agreement with our long-term partner Evoque, formerly William Hill. We'll be installing approximately 5,000 Vantage terminals across their betting shops in the UK starting in Q4 and expect to complete the install by April of 2025. We believe that the combination of the new deal structure as well as the performance uplift we've seen from Vantage Terminals being deployed and our other two largest customers in the UK will improve this segment of the business in a meaningful way in 2025. Second big event was the successful completion of a rigid performance-based evaluation of 150 terminals with Alberta, so AGLC in Canada, that converted into a sale in the quarter. This is our second Canadian province and we think validates our competitive position in G2S markets and we expect AGLC to be a meaningful customer going forward. We also have seen our performance with our installed base of customers in Illinois indexing at the highest levels since we went live there. We believe that's in large part due to the new content we have deployed in that market and it validates our view that a subscription-based content deployment strategy on a recurring basis is key to sustainable growth in PLT markets. Finally, we're in final discussions with OPAP, our large customer in Greece, to replace some of our original cabinets with Vantage cabinets as well as a newly developed slant top cabinet. The leisure segment is in the midst of their large seasonal period, particularly in the holiday parks part of the business. We're seeing a mix of performance across the segment with some of the customers overperforming and some facing headwinds. but with strong bookings in August and September. We're rolling out more advantage terminals to the pub sector of the business, and this cabinet is proving to be the highest performer in pubs, just as it has been in the betting shop business. Moving over a little bit to the cost side in terms of operating efficiencies and cost reductions that we discussed in our first quarter call, we continue to make good progress towards improving our margins. We've completed plans to move fully to outsource manufacturing and we'll be shutting down our facility in Wales by the end of the year with annualized savings of approximately 3 million and are also consolidating our logistics facilities into a shared facility with our contract manufacturer close to our operating headquarters in the Midlands in the UK, which we expect to generate meaningful savings. Lastly, we've leveraged our purchase power in a number of areas to reduce costs across the business. Overall, we saw very good momentum in the second quarter from Q1, with EBITDA performance across the business up by 57%. And we're excited about some of the initiatives that are being deployed in the second half of the year, particularly in interactive, including hybrid dealer. And obviously with William Hill, that we think will benefit not only H2, but moving strongly into 2025. So with that, I'll now hand it back to Lorne for final remarks before opening up to Q&A.
Operator
thanks Brooks I don't really have any further remarks at this time so operator if you could please open the program to Q&A yes certainly thank you we will now begin the question and answer session if you would like to ask a question please press star followed by the number one on your keypad if you would like to withdraw your question again Press star one. The first question comes from the line of Barry Jonas with Truist Securities. You may go ahead.
Barry Jonas
And specifically take privates happening in the gaming tech space right now. Really curious to get your thoughts on how you see Inspired's positioning here. Thanks.
William Hill
Barry, for some reason you got cut off at the beginning of the question. I think we got the gist of it. Would you mind just repeating it?
Wheel
Repeat it, please.
Barry Jonas
Just wanted to get your take on all the M&A and take privates happening in the space now and inspire its positioning and install this.
Wheel
Our positioning is to run the business as well as we possibly can and focus on the kind of performance and creation of initiatives that Brooks and I talked about just now. And we're not really worrying about the M&A and take private activity other than we continue, obviously, to look at acquisition for ourselves. Our focus is on growing the business.
Barry Jonas
Got it. Makes sense. And then, you know, obviously you've outlined a lot of exciting initiatives into next year, but curious how you're thinking about capital allocation here, specifically share or purchases.
Wheel
Yeah, well, obviously we think our stock is is almost laughably undervalued and buying back stock is something we want to do. I think we all know that our liquidity has been significantly impacted by the whole this whole restatement mess that thank God we're done with. But we'd probably by now have something close to $20 million more cash on the balance sheet than we have this second. So I think right now prudence would say to focus capital allocation on rebuilding our cash. Our internal forecast is as we get into the fourth quarter, maybe the latter part of the third quarter, we'll see a very, very significant increase in our cash balances because the businesses are performing beautifully and we're coming into our strongest period. So I think as we get into the latter part of the year and if our cash builds the way our forecasts are indicating that it is, then without question, our capital allocation focus would shift to going back to share repurchase.
spk05
Great. Thanks so much. Appreciate it. Sure.
Operator
The next question comes from the line of Jordan Bender with Citizens JMP. You may go ahead now.
Jordan Bender
Good morning, everyone. Thanks for taking my question. Nice to see you launch content agreements with several companies during the quarter. Can you help us frame how much more runway do you have with customers or operators that you're currently not working with in the US iGaming market?
William Hill
Yeah, not too many, to be honest, Jordan. When I mentioned in my remarks that you are now 100% in Connecticut and over 90%. in all the other big three markets. There's not a lot of customers left and those that are relatively small that we're not live with. So, you know, this has been something we've talked about for quite a while. We wanted to get, you know, the coverage of the markets. So we're pretty close to being there. Now, obviously, that doesn't talk about some of the new geographies, particularly like Brazil, where the operators are starting to, you know, get their licensing in line. And obviously we'll do the same kind of thing that we've done in the States, which is we want to cover all of that market as it goes live. But yeah, in the States, we're pretty close to being where we need to be.
Jordan Bender
Great. And then just kind of a follow-up, it may be a consumer or market-related question, but I think Greece has been kind of a headwind for the company, at least it was in the one queue. Is there any update there in terms of what you're seeing from a market perspective?
William Hill
Yeah, I think it has been a headwind for everybody. We're still the number one by performance in Greece, but kind of everybody has seen a little bit of softening in the Greek market. One of the things that I talked about was we expect to be installing some new equipment in Greece. Some of our competitors have actually already put some new equipment in, so it took a little bit of time, but we'll be putting in some new equipment in Greece, you know, end of this year, the beginning of next year, that we hope will actually propel our share of the market to maybe even a bigger lead. But that's probably the biggest driver. But, yeah, Greece in general has just been a little bit soft, you know, kind of circa four or five euros a day in what we call inspired share over the last kind of six months.
Jordan Bender
Great. Thank you very much.
William Hill
Sure thing.
Operator
The next question comes from the line of Chad Beynon from Macquarie. You may go ahead.
Chad Beynon
Good morning. Thanks for taking my question. Brooks, on the hybrid dealer, and, Lorne, you kind of touched on this as well, just in terms of it being, you know, potentially the biggest component of growth and maybe long-term kind of the biggest contributing factor for your earnings, how should we expect for this Do you think this will be an evolution for a few years in terms of a customer acceptance? Or do you think hybrid dealer adjacent to live dealer can become as big of a component of maybe North American revenues? I think in the United Kingdom and some other European markets, it's 30%. But yeah, how do you see the evolution for the segment and then more importantly for you guys? Thanks.
William Hill
yeah i mean it's an interesting question i think um in the short term um we probably have more demand than we have capacity right now obviously we've you know we're rolling out bet mgm into multiple markets and you know we've announced the deal with with caesars but quite frankly the pipeline of of deals that we've got across the business not only in north america but around the world is is more than than we can actually handle Because we're also building product as we talked about. We've got the roulette product and multiple variations of the roulette product. But from a strategy standpoint, we ultimately want to get to a fairly generic roulette product and a fairly generic side bet roulette product. So we don't have to spend as much time on the bespoke side. But going forward, so third quarter and fourth quarter of this year is going to be all about getting these games built and getting these customers live. Um, and then I think rolling into 2025, um, you know, there's, there's kind of endless opportunities for us, both in derivatives of the roulette game. We hope to do a craps game. Um, we'll obviously broaden our distribution to customers. And I think that's part of what both Lauren and I have talked about having this be such a meaningful contributor. Um, you know, the sequencing was developing the product, getting it out there. seeing if there's customer acceptance and seeing if the take-up is what we'd hoped for and that it was sticky and that players returned to it. And all of that, we've kind of checked all of those boxes. So now it's really all about building the product as fast as we can and rolling it out as fast as we can.
Wheel
One other point to add there, Chad, is in terms of your question about, you know, how big can the hybrid dealer business be relative to the traditional live dealer business, there are dozens, if not hundreds, of online gaming operators around the world who simply can't afford the traditional live dealer product just because the cost of producing it is just so, so much higher than ours. So right now, obviously, we're focused on the top tier operators because they're the ones that want it. But as Brooks talked about, as we develop a generic product that's not branded for MGM or branded for Caesars, then now for the very first time, there's a product that's available to you know the second and third tier operators who simply don't participate in that business right now so we see that as a huge potential to expand the overall size of the market it's helpful thank you both um and then shifting to the lottery segment any updates in terms of what you guys are doing there or how you kind of view the opportunities within that category
William Hill
Yeah, I mean, a couple things. You know, we're working pretty actively with a number of lotteries. You probably saw that we announced a deal with Cy Games to get our content through their content integration hub. Obviously, Lorne in particular, but, you know, me included have had a lot of experience in the lottery industry. And we think our product would work very well. And frankly, we think Hybrid Dealer would work very well in the lottery segment as well. You know, a company of our size, there's only so many of these things that you can do simultaneously. But we are very bullish on the lottery market, and we think we'll have some announcements about some additional customers in that segment, you know, coming up in the next quarter or two.
Chad Beynon
Thanks, Brooks.
spk05
Appreciate it.
William Hill
Okay, Chad. Thanks.
Operator
The next question comes from the line of Ryan Sigdahl with Craig Hallam. You may now go ahead.
Ryan Sigdahl
Hey, good morning, guys. Two on interactive. One, you guys have had strong growth. A lot of that is market expansion, customer expansion, et cetera, through most of that in the U.S. You have hybrid dealer now coming in. But what's your confidence to maintain this level of revenue growth for the next several quarters? And then secondly, on hybrid dealer, Do you have any player insights on kind of demographics and who is playing the game thus far? I know it's a small sample size, but is it the traditional live dealer player that's now playing both? Is it someone that didn't play live dealer and an RNG player, et cetera, et cetera? But any player help you can give would be good. Thanks.
William Hill
Sure, sure. Yeah, in terms of the iGaming stuff, You know, like I mentioned, July's been the highest month we've ever had. And last week, which August is typically actually a slower period, was the highest revenue week we've ever had. So I'm encouraged by that. And as I also mentioned in my remarks, we're now rolling out progressive games for the first time. And we think there's some more headway or there's some more opportunity there. Clearly, Brazil's a big market that's going to come on. You know, we see the growth trajectory, you know, circa 30% or higher to be sustainable here for, you know, at least for the foreseeable future. In terms of your question about hybrid dealer, so the interesting thing about the mix of hybrid dealer is that the main thing we wanted are players returning. But we have a very interesting mix of players that are betting lots of money. you know, so-called whales, but we also have a huge number of players that are playing on an everyday basis. So the granularity of what else those customers are doing, that's really with our operators. And frankly, we probably need to sit down with BetMGM in particular and talk about that because that will probably drive a little bit of product enhancement. But What we're seeing that we care about the most is the number of players, active players, and the number of returning players and the mix of how they play, you know, big players versus small players. This is kind of exactly what we would hope for. It goes really across the full spectrum.
Ryan Sigdahl
Thanks, guys. Good luck.
William Hill
Thanks, Ryan.
Operator
That concludes the question and answer session, and this concludes today's conference call. Thank you for your participation. You may now disconnect.
Wheel
Thank you, operator. And thanks everybody for participating this morning.
Disclaimer