Inspired Entertainment, Inc.

everyone and welcome to the inspired entertainment fourth 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 press star on your telephone keyboard please note today's event is being recorded please refer to the company's safe harbor statement that appears in the fourth quarter 2024 earnings press release, which is also available in the investor section of the company's website at www.inceinc.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 statements 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. Our consultation is included in the earnings press release. With that completed, I will now turn the conference call over to Lorne Watt, the company's executive chairman. Mr. Watt, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining our fourth quarter earnings call. First, let me say I'm sorry that due to circumstances beyond our control, the press release went out. later than it usually does, and I hope that hasn't caused too much consternation. With me, as usual, are Brooks Pierce and Eric Herrera, and we welcome today our new CFO, James Richardson. James joined at the beginning of the year, just as we were knee-deep into the audit process, and with this call today, we successfully conclude his baptism by fire. Adjusted EBITDA for the fourth quarter was $30.9 million. up 22% from last year. The full year adjusted EBITDA of $100.1 million and $99.3 million for 24 and 23 respectively reflect minor revisions to prior results due to the timing, but not the total amount of revenue recognition. We can discuss this more in Q&A if anybody wants to understand it more clearly. As a result of these revisions, we intend to file our 10K by Wednesday this week or by the end of the week at the very latest. Additionally, and perhaps more importantly, as we'll be disclosing the 10K, we recently received a letter from the SEC informing us that our inquiry is now closed and that they would be taking no further action. We are, of course, very pleased with this outcome. The results for the fourth quarter and full year are in line with expectations and we feel that all the business areas are in very good shape. The interactive business continues to be the star of the show with fourth quarter revenue and EBITDA growth of 45% and 105% respectively. Interactive accounted for approximately 22% of overall company EBITDA after corporate cost allocation in the fourth quarter. and given its growth trajectory, we think it will reach well over 25% by the end of the first quarter. I think it's maybe not widely understood that in the handful of states that have both iGaming and sports betting, primarily New Jersey, Pennsylvania, and Michigan, iGaming dwarfs sports betting by a ratio of 4 or 5 to 1. Of course, we can't predict the rate at which new states will adopt iGaming legislation, but my many years in the gaming industry, I'd rather not say how many, convinced me that, as was the case with horse racing, lottery, casino gaming, tribal gaming, and most recently sports betting, the eventual spread of iGaming is inevitable, especially as in the current environment, individual states begin finding themselves short of cash. So the opportunity for us in this business is limitless. and our commitment to product and technology performance is concomitant. The other part of our digital business, virtual sports, continues to perform at an extraordinarily high level of profitability, but at the same time continues to try our patience. During our third quarter call, we predicted that we expected virtual sports revenue to hit an inflection point during the fourth quarter, and this did not happen. Brooks will delve into all this in more detail in a moment, but given performance so far this quarter, we seem to have indeed passed the inflection point, butchered by a number of deliberate actions we have taken to strengthen the business. Given modest acceleration in virtual sports, together with the aforementioned anticipated growth in interactive, we expect our overall digital business to approach 60% of EBITDA by year-end. At the same time, our retail-oriented businesses continue to perform very well, with content creation and distribution being the primary drivers. In Illinois, for example, the only jurisdiction in America so far to adopt a server-based gaming model, our products are performing extremely well, and our installed base of razors now generate an excellent recurring stream of blades. With there being a lot of talk today about recession, I want to mention that our business right now is structured extremely well to sail through any downturn. Over half our profit, as I mentioned a moment ago, is digital. Over 85% of our revenue is contractually recurring. Our EBITDA margins are high and our leverage quite comfortable. But let me conclude by touching on a couple of these points. While one-time equipment sales account for only 10% of our overall business, which speaks very well for our inherent recession resistance, they sometimes fall disproportionately late in the fourth quarter, and 2024 was one of those years. As a result, there was a significant year-to-year increase in accounts receivable from year-end 23 to year-end 2024, and this in turn resulted in our year-end cash being less than anticipated. A snapshot a few weeks later would have shown a very significant difference. Finally, on the subject of leverage, most of you would know that our current credit facility matures in June 2026 and would therefore become current in 2025. Consequently, we've been working hard with the goal of having a new facility in place prior to June. With the expectation that rates are likely to generally drift downward and perhaps down still more so in the event of a recession, Our new facility is more likely to be floating rate rather than fixed as it is now, and to be generally more flexible. And with that, I'll turn it over to Brooks.

Okay, thank you, Lorne, as I usually do. I'll try to give some more color to the fourth quarter and year end and what we're seeing thus far with the first quarter of 2025. So let's start with our digital business segments, interactive, which includes hybrid dealer and virtual sports, where we've seen consistent growth. Our interactive segment grew revenue by over 13% quarter over quarter, and we're seeing the operating leverage within this segment with adjusted EBITDA margins increasing to 65% for the full year from 55% last year. We've seen those trends continue into the first quarter of the year, with February actually being the second highest daily average revenue month we've ever seen. These revenue and EBITDA trends are broad-based from both a geographic basis and from a customer basis, with no specific concentrations in either, but the growth we're seeing with Tier 1 customers in particular is very gratifying. We're seeing all of this with very little contribution thus far from the Brazil market launch in January, and we expect that to be a very good market for us. This performance is really a testament to the great work done by the product team in concert with strong account management, and our roadmap for the year looks very strong. Moving over to hybrid dealer, we're now live with three customers. including BetMGM, Bet365, and Caesars. We continue to see strong performance from this group across multiple geographies, but we still believe the best is yet to come. We expect to launch our next branded roulette game with Lotto Quebec in the second quarter, along with an expected launch of our four-ball extra bet game. Both of these are significant in their own right, and we look forward to reporting on their progress in the near future. pipeline of customers for our hybrid dealer game is robust with a very good mix of both geographies and tier one and tier two customers. 2024 was a challenging year for our virtual sports businesses we've discussed many times and was largely due to a revenue reduction from our largest customer. The rest of our customer base actually showed modest year-over-year growth in 2024. And as mentioned in our earnings release, we've made the decision to consolidate the virtual's product and technical function that had previously been separate into the company-wide product and technical group. This group has largely been responsible for our success in the interactive segment, the development of our hybrid dealer products, the successful launch of our Advantage cabinet in the UK, as well as notable growth in our North American VLT footprint. I'm very excited by the early progress of this combination, and the group has already presented some exciting new innovations in virtual sports. We've shared these innovations with our two largest customers and both are enthusiastic about getting these out to the market and to their players. This group's also been instrumental in the development of our first online lottery product for virtual sports in the U.S. market that we'll be launching with Aristocrat Interactive into the Virginia lottery at the end of April. We've seen the stabilization of our virtual's revenue in the first quarter thus far, and the combination of the new organization, new products, and key new markets like Brazil give us confidence that we can get the virtual sports business back into growth mode. In our land-based business, our gaming segment had EBITDA growth of 42% year-over-year in the fourth quarter, due in part to gaming hardware sales in the period. We expect the rollout of our Vantage Cabinet to the William Hill Estate to be completed by the end of the first quarter, and we're already seeing the benefit of that conversion as Vantage Cabinet replacements are producing cash box growth in excess of 10% on a like-for-like basis. We're also in the early stages of rolling out new cabinets to our customers in Greece with the introduction of a slant top cabinet, our first iteration of this style in Greece, and we expect to start seeing the benefit of new cabinets in this key geography as we get further in the year. We also showed a new portrait cabinet at G2E in October for the first time and have started trials in Illinois and expect this to be successful. We're indexing at our highest levels ever in Illinois, and we've had most of our customers sign up for our subscription service, which gives a good recurring revenue stream to this market that's maturing and allows us to keep our content fresh and showing in the performance. In our leisure segment, we showed a solid 7% revenue growth year over year in Q4, with a larger increase in EBITDA growth due in part to improved margins from cost improvements and some one-time adjustments. We continue to see the performance of our Vantage driving increased performance in pubs, and we're adding this to our customers' locations significantly as we move through the first half of 2025. We've extended the contracts with our two largest MSA customers, Moto and Welcome Break, and are seeing improved performance there as well. Q4 is seasonally the lowest quarter for our holiday parks business, but we're gearing up here in the first quarter for the 2025 season. So in summary, our land-based businesses, including our lottery systems contract in the Dominican Republic, continue to perform well and provide a steady source of recurring revenue. This allows us to continue to drive our digital businesses, which represent more than 50% of our combined EBITDA. Furthermore, we expect to see the benefit of our reorganization in the virtual sports segment, as well as new milestones for our hybrid deal product as we move further to 2025. With that, I'll pass it back to the operator for Q&A.

At this time, I would like to remind everyone in order to ask a question. Press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question comes from Terry Jonas from Truist Securities. Your line is open.

Patrick Keogh on for Barry this morning. Um, to start off on virtual sports, I think we understand the struggles with your largest customer, but could you dive any deeper into the challenges that segment is facing? Thanks.

Yeah, I think it's well, if you, in looking at the numbers, it really is driven by, um, one customer, but we're starting to see, um, I think as we mentioned, um, some stabilization. with that customer, which actually gives us some great comfort. And the rest of the business has shown modest growth in the same periods. And I talked in large part about this reorganization of the product group. And we've brought it into the main fold. And we've come up with some pretty interesting new innovations, really playing on some of the success that we've seen in sports betting and same-game parlays and things like that. and we've taken that out to show to our two biggest customers, both of which really thought it was a great innovation and want to get it live as soon as possible. So we feel confident that the margins, I think as Lorne mentioned, the margins are extremely high, over 70% EBITDA margins. So we still feel very bullish about the virtual sports business on a going forward basis.

Okay, great to hear. Thank you for that. As my follow-up, Have there been any updates to how you're thinking about M&A, either from a buy or sell side perspective here, including any thoughts on the strategic review of holiday parks? Thanks again.

Well, on the strategic review of holiday parks, we're where we have been, which is that we're seriously exploring the sale of holiday parks. We're cautiously optimistic that we're going to come to a favorable conclusion, but until something is firm, obviously, there's not much more we can say, but it's certainly moving in the right direction, and we've been working on restructuring the rest of the business in anticipation of doing that. Beyond that, I don't think we have any intention or any reason to be thinking about divestment because the rest of the businesses are performing extremely well, as Brooks talked about a second ago. As far as on the A side of M&A, we're always looking for something that makes sense. We have an active program doing that. Our balance sheet is is in very good shape in terms of having capacity to do something. We have a fairly rigid set of criteria for anything we might do. Right now, there is nothing on the horizon, but we continue to look. And if something comes along that fits the criteria, then we'll go ahead with it. Right now, again, there's nothing beyond that that I can say.

Great. I appreciate it.

The next question comes from Jordan Bender from Citizens. Your line is open.

Good morning, everyone. I was wondering if we could get an update on where the UK White Paper sits today, and are there any noticeable impacts we should expect

in the market or for your business in 2025 yeah probably the the there's one development that's going to happen and one that we actually hope will happen in terms of the the stakes limits so that's that's a fact and that's going to happen and we've uh assumed that in all of our budgeting and forecasting and and we think it will have a minimal impact because we'll continue to innovate from a game standpoint to deal with that. But we expected that, knew it was coming, and I think it starts in April. Probably the part that we're waiting for is the liberalization of B3 cabinets so that we could get – there's a restriction now on the number of B3 cabinets that you can have in the U.K., and there's been a lot of talk about that being – liberalized a little bit, which would obviously be very good for us in terms of some of our one-time sales in the UK. But that's still to be determined.

Thank you for that. And on the follow-up, the cash balance is dipping quarter over quarter. Should we still expect, I think you gave guidance of one Q cash of 50 to 55 million. Is that still the right way to think about it?

I would say it's going to be a little bit lower than that because I think as Lauren talked about, there's been some delay in the receivables. So I think directionally it's right, and we'll have to see as we get a little bit further along. But I'd say it's probably a little higher than we would expect. It's probably going to be a little bit lower than that.

Yeah, just to add to that, Eric, we also just at the time, I don't think we – The timing of the cash payments for certain suppliers, like for the William Hill deployments, we actually accelerated that. We're going to get that done by the end of March. I think earlier we guided it's going to be early Q2. We'll have that done by the end of this quarter. So there's been some supplier-related payments that just sort of accelerated. Awesome. Thanks, everyone.

The next question comes from Ryan Sigdal from Craig Holland Capital Group. Your line is open.

Hey, guys. I want to stay on virtual sports. So given the high single-digit growth outside of your top customer there, it implies pretty big declines from that customer, which we know. But I guess what gives you the confidence to say that you're past that inflection point? I feel like we've heard that for several quarters now that the business was plateauing and it continues to drift lower. So curious what you've seen year-to-date in 2025 and kind of real-time.

Yeah, well, I can definitely give some comfort on that since I have seen real-time data in the first quarter and, you know, at least halfway through March. You know, it really has kind of leveled out. A lot of that is in part probably the only difficulty that we've seen is in Brazil, you know, this transition starting January 1st where everybody had to kind of shut their accounts down and bring their accounts back up. So January was just a little bit soft, but February actually recovered from that. And look, we still happen to believe that on a going forward basis, Brazil in particular is going to be a very significant market for us. You know, two of our biggest customers, Bet365 and Pitano in Brazil, which represent right now about 40% of the market in Brazil, are seeing, you know, very strong results. And as we start adding more and more customers, I think we've done press releases on our partnership with Canby, our partnerships with Altanar, plus some of our individual deals. We expected Brazil, by the time it's all said and done, to probably end up being the biggest market we have. So first quarter, pretty stabilized, but certainly we think there's a lot of potential for growth in virtual sports still.

Helpful. Hybrid dealer, you mentioned three customers you're live with, Caesars, MGM, Bet365. You had a press release from FanDuel launching a hybrid dealer game back in October. I guess curious where that stands because presumably it's not live yet.

No, it's not live yet, and it's a pretty big bespoke project. FanDuel has been great to deal with on this. And we would expect this product not to go out until right before the launch of football season in 2025. So it won't be before then. But I think it'll be, you know, frankly, with FanDuel's participation, I think it will be a pretty significant product launch.

Great. Thanks, guys. Good luck.

Thank you.

Again, if you have a question, kindly press star followed by the number one. The next question comes from Chad Baynon from McCarrick Group. Your line is open.

Hey, guys. Good morning. This is Aaron on for Chad. Thanks for taking our question. First, I wanted to ask about, you know, given additional bandage machines and other retail opportunities, can you just talk about CapEx needs and what that means for cash flow?

yeah well i think in terms of of capex um you know we mentioned um the the moto and welcome break renewals which will require some capex um we're in the midst of of uh upgrading a number of our pub customers uh and that will also take capex but i think all of that's been planned for and budgeted for, so nothing has come out of the woodwork that's unexpected. So I think from a CapEx standpoint, and Eric can jump in if he wants to add anything to this, but it's going to be roughly the same as what we've seen the last couple of years. So nothing out of the ordinary.

Got you. Okay, that's helpful. I also wanted to ask about the lottery business. Can you just talk about where you see the opportunities in 2025 to drive growth or sign new contracts? And how should we be thinking about the benefits from the new cloud-based lottery system? Thank you.

Yeah, thanks. No, that's a good question. So we are planning to hand over to our customer, hopefully by the end of this month, it looks like, or maybe just in the beginning of April. for their part of it, the customer acceptance testing. So the development is largely done. And I think when we get that and when we put it into the DR, you know, we think it will be the most advanced lottery system anywhere. And Lauren can comment about the potential for, you know, the sale of a system like this around the world. But, you know, we look at lottery in a couple of different vectors. So one is obviously the systems business that we just talked about. We're super excited about this launch of virtual sports with the Virginia Lottery and Aristocrat at the end of April because we think that's the first time, we think that will be the first time that it's an online lottery product in the U.S. And for those that don't know, Virginia Lottery is a very successful company I lottery state with doing over a billion in sales. So we're super excited about that product. And both Virginia lottery and aristocrat have been very involved in the, in the delivery of that. And we still believe lastly, and on the lottery segment, that e-instance is a natural advancement for using some of our content that's been successful kind of around the world. So I'd say the e-instant development is probably a little behind where I would like it to be, but we still think that's a very viable opportunity. So lottery is a very key segment or channel for us that we probably don't talk about as much as we should, but we do think that over the next couple of quarters, we'll start seeing some pretty significant opportunities in the lottery segment.

Great. Thank you. Appreciate the color.

No problem.

That concludes our Q&A session. I will now turn the call over to Lorne Weil, the company's executive chairman, for closing remarks.

Thank you very much, operator. I don't really have much to add. I think Brooks gave a very comprehensive overview of where each of the businesses is. I do agree with him that everything we're seeing seems to suggest that the virtual sports business has passed an inflection point. I think the most important point is as far as virtual sports goes is we've put a significantly renewed focus on product development and product enhancement. I think for a while because we had a tiger by the tail with Interactive. We were throwing everything but the kitchen sink at Interactive, and you can see by the phenomenal growth in both revenue and profitability that that focus and that development has really paid off. And I think, to be honest, for a period of time, we We're probably under investing in product development and virtual sports just because the interactive opportunity was so huge. But now I think we're not diverting resources, we're adding resources. And I feel cautiously, more than cautiously optimistic that we can duplicate in virtual sports, what we've been seeing with Interactive now that we've got the focus on product enhancements. And I think we'll start to see this in the next few quarters. Other than that, I don't really have anything else to say. Everything else is in very good shape. Balance sheet's in good shape. Cash is in good shape. And we look forward to talking to you in a few months. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.