Inspired Entertainment, Inc.

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.

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.

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.