Inspired Entertainment, Inc.

Good morning, everyone, and welcome to the Inspired Entertainment Third 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 Third Quarter 2024 earnings press release. which is also available in the investor section of the company's website at www.inseinc.com. These safe harbor statements also applied in 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 SEC. These statements are based on management's current expectation or beliefs and are subject to risks, uncertainties, and changes in circumstances. In addition, please note that the company will discuss both GAAP and NGAAP financial measures. Our reconciliation is included in the earnings press release. With that completed, I would now like to turn the call over to Lorne Whale, the company's executive chairman. Mr. Whale, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining our call today. We understand there's some pretty stiff conference call competition this morning, so we definitely appreciate having you with us. In a few minutes, Brooks will take us through the businesses in some detail, highlighting the primary growth drivers, our underlying plans to exploit them and the trends we're seeing. But from 30,000 feet, I would summarize things as follows. The interactive business continues on a growth tear where we're seeing the compound effect of accelerating revenues and expanding margins. Virtual sports is maintaining extraordinary margins while revenues continue to tread water. We think revenue is approaching an inflection point as the previously discussed customer concentration impact flattens out The rest of the customer base experiences healthy growth, especially in the digital space. Brooks will talk about this some more in a minute. And we see the impact of important new products. And lastly, our retail-oriented businesses are performing very nicely, benefiting from normal businesses' usual conditions in our various markets. Overall year-to-year EBITDA growth in the third quarter was 13%, and our EBITDA margins are inching closer to our 40% target. Entering a period of normalcy is having a particularly positive impact on our cash performance. As you can see in the earnings release, we ended the third quarter with a cash balance of $36.5 million, up from $23.5 million at the end of the second quarter, reflecting, among other things, the fact that the enormous cost of the accounting restatement is now behind us. We don't normally provide forward guidance, as you know, but I think we'll make an exception here and mention that we expect our cash balance to be between 50 and 55 million at the end of the first quarter of 25, with this year's fourth quarter being somewhere in between. Well, it's a bit of an oversimplification of the accounting. The increase in cash over the nine-month period ended in March 2025 will therefore have been roughly $30 million, representing in our mind an appropriate cash conversion percentage of the underlying nine-month EBITDA. As our cash approaches these levels, we can once again consider asset allocation alternatives. The matter of cash is also informing our thinking concerning our holiday park business, about which we get asked, obviously, quite often. When we first began to consider the sale of holiday parks, we challenged ourselves to develop a plan to consolidate and re-engineer the remaining retail businesses so as to recapture through cost reduction all the EBITDA being sold. We have indeed successfully developed this plan and have begun to implement it so that regardless of what happens to Holiday Parks per se, we will see this benefit fully in 2025. As for the Holiday Parks business itself, We're currently projecting free cash flow of at least $5 million in 2025, a coupon we're quite happy to keep clipping until further developments. Lastly, as we announced in the press release issued yesterday, James Richardson is joining us as our new CFO starting on January 1st, 2025. As hopefully you read in the press release we put out yesterday, James has an extensive background in financial reporting and governance across multiple companies in different industries, including, perhaps most importantly, at William Hill, where he served as the global finance director for their online gaming business. James' leadership and technical accounting expertise will be of great value to the company, so I look forward to welcoming James on our next conference call early next year. I'd also like to take this time to thank Marilyn Jensen, who has been our interim CFO since the end of last year. and has done a genuinely tremendous job over the last 12 months. Marilyn has agreed to stay on as our transformation officer through the middle of next year. And so we thank her for her continued commitment to the company. And with that, I'll hand it over to Brooks.

Thank you, Lorne. And I echo your remarks about Marilyn. She's been terrific to work with for the last year or so. So I'll try to expand on the comments on the individual segments as well as the progress on some of our operating initiatives to progress towards our goal of the 40% EBITDA margins, which I'm happy to report reached 38.6% in the third quarter, which was up three percentage points from quarter three of last year. Our interactive business continued at strong performance with revenue increasing 40% over Q3 of 2023 and EBITDA increasing 47% year over year, even with increased costs as we prepare for the full launch in Brazil by the end of the year. Our adjusted EBITDA margin in this segment is now up to 67.6%. This growth was fairly well spread out between performance in the UK and North America and is due in large part to the continuation of strong and consistent game roadmaps and we're starting to see good growth in some of our other key markets such as Italy. We expect to add both Peru and South Africa in the fourth quarter this year and expect that these markets will also help the growth profile. Just to give you some sense of that, October set a new all-time high for monthly revenue in this segment, largely driven by some of our seasonal content around Halloween, including our best performing game in the month, Golden Halloween Winner. We're very proud of our reputation as being the seasonal games leader, and we have a great lineup of Christmas-themed games ready for December, typically our peak month of the year. We plan to add additional studio capacity in the next quarter or two with one of the studios focused primarily on the North American market exclusively to support our growth and to continue to deliver the quantity and quality of games to this expanding segment. We also continue to refine our iLottery content strategy and game deployment. We'll be updating progress on that on our next call. We showed some of our major enhancements to the hybrid dealer category at G2E, including a standard roulette game, a Brazil roulette game, and a very exciting side bet roulette game called Four Ball Extra Bet with a two-wheel configuration leading to an exciting innovation for roulette. This product set shows the unique configurability of hybrid dealer and offers a gameplay that you can't experience with physical wheels. We also showed the new Caesars bonus game called Caesars Palace Wheel of Winds and expected to get this game and the other roulette games live this year or early next year. We also announced new contracts with both FanDuel and Lotto Quebec and expect to be live in additional states, provinces, and countries over the next quarter or two as our pipeline of customers and products and jurisdictions continues to build. Needless to say, we're very bullish on the interactive segment, continuing to be a primary driver of the growth of our digital business. The other part of our digital business, virtual sports, continues to be impacted by the decline of our largest customer in the segment. However, all other customers' recurring revenue grew 11% year over year, with 21% of that growth coming from the online segment of that customer base. We still firmly believe that the combination of new licensed products like our NFL, NBA, and our recently announced NHL license, along with new geographies like Brazil, will get this segment back into growth mode. But we've been beset by delays due to customer resource issues, technical integrations, and regulatory approvals, which frankly have just slowed the process down more than we'd like. For example, we're live with only two customers with our NFL products. but the NFL game is actually performing very well with those two customers, neither of which happens to be in North America, which we ultimately believe will be the biggest market for the NFL game. It's now looking more like the end of the year and the beginning of 2025 before we'll solve some of these issues. Our gaming segment had a solid quarter with revenue, excluding low margin sales, up modestly at 4% year over year, but with EBITDA increasing 29% year over year. It's always difficult to make exact comparisons in this segment due to the nature of timing, revenue mix, and one-time sales, but we're starting to see the impact of some of our cost savings initiatives coming through the income statement. And we'll see that accelerate in the fourth quarter with the shutdown of our manufacturing facility in Wales and going to a fully outsourced manufacturing model. We have a number of deliverables in the fourth quarter and the first quarter of 25, including 720 terminals to WCLC. the installation of close to 5,000 vantage terminals to Evoque, formerly William Hill, and the start of the installation of up to 4,000 terminals to OPAP in Greece. We expect to see the benefit of the conversion of the Evoque terminals modestly in Q4 and the biggest impact starting in Q1, and I'm happy to announce that the first site conversion happened in late October. We also introduced a new cabinet at G2E, the Valiant, which is our first portrait cabinet specifically designed for the North American market. The response we received from our customers and potential customers was overwhelming, and we're already starting to take orders for this product, largely on the improved performance we're seeing in our North American installed base. This success is driving us to explore leveraging our cabinet, content, and system capabilities for adjacent markets like Class 2 and HHR, and we'll update as we finalize our review. Lastly, our lottery systems business, which is reported in our gaming segment, grew 8% year over year, and we're making tremendous progress on our new cloud-based lottery system that will deploy and start to market in 2025. The leisure segment performed well in its historically busiest quarter, with revenue up 5% year over year and EBITDA increasing by 17% year over year. demonstrating the benefit of the operating leverage in this business and the impact some of our operating efficiencies are having on our financial results. Although we are still reviewing strategic options in regard to the Holiday Parks business, we firmly believe our content, cabinet, and service strategies in the pub, bingo, and motorway service segments are bearing fruit, and we continue to believe that they are key components of our land-based business and frankly leverage the combined technology and content development function that supports all of our business. The third quarter EBITDA of 30.1 million with close to 40% EBITDA margins along with the product and geography expansions that I outlined earlier in my remarks gives us confidence both in our strategy and the ability to deliver improving results in Q4 and going into 2025. And with that, I'll hand it back over to Lorne for any final remarks before we open up to Q&A.