Light & Wonder, Inc.

Welcome to the Light and Wonder 2022 Second Quarter Investor Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star followed by one on your telephone keypad. Now let me turn the call over to Jim Bombasi, Senior Vice President of Investor Relations for Light and Wonder. Mr. Bombasi, you may begin.

Thank you, Operator. Good afternoon, everyone. During today's call, we will discuss our second quarter 2022 results in operating performance, followed by a question and answer period. With me today are CEO Barry Cottle and CFO Connie James. Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued earlier this afternoon, the materials relating to the call posted on our website, and our filings with the SEC. We will also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings release as well as in the investor section on our website. On September 27th of 2021, we announced that we had entered into a definitive agreement to sell our sports betting business to Endeavor. And subsequently, on June 30th of this year, we entered into an amendment to the definitive purchase agreement. During the second quarter, we completed the sale of our lottery business to Brookfield Business Partners. Accordingly, we have reflected these businesses as discontinued operations in our consolidated statement of operations and reflected the assets and liabilities of these businesses as held for sale in our consolidated balance sheet for all periods presented. We are reporting our results of continuing operations in three business segments, gaming, side play, and iGaming. Amounts and disclosures referring to combined include both our continuing and discontinued operations. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the investor section on our website at lmw.com. Supplemental reference slides are available on our investor relations website to help facilitate your review of the company's results, including an earnings presentation. And now I will turn the call over to Barry.

Thank you for joining us today. This is a pivotal year for Light & Wonder. And I'm excited to discuss the significant progress we have made transforming our company, as well as the success we are seeing as we execute on our roadmap and delivered strong operating performance this quarter. When you look at what we've accomplished, you see clear evidence of our ability to deliver on the promise of transforming our company and to drive significant value for our shareholders. We completed the sale of the lottery business, enabling us to deliver and reconstitute our balance sheet. And we proactively amended our sports betting sale agreement, increasing the speed and certainty by creating a simplified path to closing the transaction by the end of Q3 at a strong valuation, bringing in $800 million gross and approximately $700 million in net proceeds. Together, these two dispositions will generate approximately $5.6 billion in net after-tax cash proceeds. and they represent the final step in the process of streamlining our organization. To that end, we are poised to further enhance shareholder value through our capital allocation priorities, debt pay down, share repurchases, and a disciplined approach to investing and growth. With the proceeds from our lottery sale, we paid down our debt, enabling us to achieve a net leverage ratio of 3.6 times at quarter end, a seven-turn reduction from our peak leverage just 18 months ago. Additionally, since we announced our share repurchase program in March, we have bought back 203 million or 3.7 million shares, approximately 27% of our 750 million authorization or over 4% of our market cap in just five months. With our streamlined organization, sharpened focus and strong balance sheet, this all creates a powerful foundation to build from as we execute on our vision of becoming the leading cross-platform global game company. The opportunity here is enormous. We are squarely pointed at the $70 billion TAM across all game markets. No one else can match our wealth of great franchises or our ability to deliver great games to players anywhere they want to play. What is so exciting is that we have all the pieces in place as we execute on this strategy. And we have a tremendous opportunity to drive shareholder value underpinned by the long-term targets we laid out at our investor day. We have an enviable and sustainable growth profile, including double-digit growth with a high mix of recurring and digital revenues. A strong balance sheet with a targeted net debt leverage ratio range of 2.5 to 3.5 times. 1.4 billion of targeted A EBITDA by 2025. which translates into a targeted CAGR of 15%, and a target of approximately $10 billion of capital to be generated by 2025. Our strategic progress on our transformation and results this quarter give me great confidence that we can achieve these targets with our robust product roadmap and continued execution. Now, turning to quarterly results. Overall, we delivered continued strong results with consolidated revenue growing 5% to $610 million and consolidated A EBITDA of $212 million. Prior year period consolidated revenue and A EBITDA benefited from the $38 million VAT recovery. Excluding the VAT impact, year-over-year consolidated revenue and consolidated A EBITDA growth was 12% and 9% respectively. This momentum is the result of the fundamental changes we have made throughout the company and our top-ranked product performance across gaming, iGaming, and side play, like Ultimate Firelink, with its extension Ultimate Firelink Explosion debuting as the number one WAP game on Eilers. Coin Combo, a land-based favorite, achieving yet another record launch in iGaming with Hurricane Horse. and highly anticipated carnival cow and terrific tiger set to launch in the second half of the year. And goldfish, where goldfish feeding time drove incremental side play visitation and engagement metrics, which was a hugely successful cross-platform launch. We have built a leading and unique position in a market that's not only huge and converging, but it's also been historically resilient to the dynamic economic environment. In fact, current GGR levels remain strong, just as they have during past economic cycles. However, we continue to closely monitor trends and remain proactive, taking steps that have positioned us well to successfully navigate this evolving environment, including proactively implementing measures to offset inflationary pressures, creating a global supply chain, and driving operational efficiency throughout our organizations. So we remain competent about our industry and our path forward. Now let's go deeper into each business unit. Starting with gaming, where our new strategy and product roadmap are already delivering robust underlying growth. As a reminder here, we had a VAT recovery benefit of $38 million on the top and bottom line in the prior year quarter in the gaming ops business. Excluding this benefit, Each business line delivered double-digit revenue growth year over year. We achieved tangible success across our three largest TAMs, the North American Premium Gaming Ops Market, the North American For Sale Market, and the Australian Market. We now have new competitive hardware in each critical segment, setting us up for growth as the market continues to recover and operators ramp their capital budgets. For example, we recently launched the highly anticipated Cascada dual-screen cabinet globally, and we saw strong performance out of the gate in both the U.S. and Australia. We also released the Landmark 7000, a stunning mechanical reel machine for the nostalgic slot player. This launch was another huge success, with our Blazing Sevens franchise titles debuting at number one and number two in the Eiler Stepper segment. It is also worthwhile to note that the last two cabinets we launched are number one in their categories with the top ranked game in the latest Eilish report. When it comes to gaming, our North Star remains building the best games and enabling platforms. That's why we've ramped our game roadmap and focused on leveraging our proven evergreen franchises created by some of the best game design talent in the industry. Our strategy is working. Starting with GameOps, This quarter we saw continued gains with sequential growth in our total North America install base. Growth was fueled by the eighth consecutive quarter of growth in our premium install base, resulting in a record premium mix at 43% of our total North America install base. I want to highlight alternate Firelink explosion was recently ranked by Eilers as the number one WAP gain, which we expect to drive growth in the second half of the year. In fact, since its initial launch in 2016, we've released seven games under the Ultimate Firelink franchise, and performance is truly exceptional. It's a great example of how we're leveraging our Evergreen franchises to grow market share. Turning to domestic game sales, we saw significant gains as we shipped 4,009 units, up 19% sequentially. And in a sign that the market continues to move toward recovery, we saw replacement units approaching 2019 quarterly run rate levels. The newly released Hoppin' War Pulse, which launched on the Cascada dual screen, debuted at number one on the Eilers for Sale list. And we saw additional success from Goldfish Feeding Time and Rich Little Piggies Hog Wild, all successful extensions of our proven evergreen franchises. Meanwhile, in Australia, we grew market share on the back of Cascada dual screen cabinets and the performance of games like Dragon Unleashed and Hup and More Puff, which ranked number one and number three in Queensland. Turning to systems, we're continuing to invest in technology that makes us not just market leaders, but thought leaders. Our iView 4 continues to drive cashless enablement, and we more than doubled shipments of that hardware sequentially, which is now deployed across two-thirds of the slots in our systems business footprint. Finally, in tables, We continue to leverage our wealth of experience in IP to maintain our market-leading position. Sequentially, we grew our shuffler install base while adding more subscribers to our vault program, which now stands at over half of our North American customer base. We're also continuing to invest and drive innovation to grow our ETG business, which we see as a growth segment. We continue to successfully execute on our playbook with growth across all four business lines, enabled by a reinvigorated product roadmap focused on our largest profit pools backed by great design talent. Let's now turn to iGaming, where our results demonstrate our ability to leverage our unrivaled position in the marketplace, including our original content, unmatched iGaming platform, and leading PAM, to deliver best-in-class offerings to our partners and players. U.S. revenues increased 47% year-over-year, growth that was driven by GGR scaling, as well as continued market share gains. Our original games underpinned our market share growth in the U.S. If you look at the top 20 games on our iGaming platform, our original content fueled more than 70% of GGR, a testament to the affinity players have for our land-based franchises and digital native games. We also saw strong performance from our Lightning Box acquisitions. which remains the number one digital native studio on our iGaming platform in the U.S. Creating and leveraging great games continues to be the core of our strategy and our success. This quarter, we saw the record launch of Coin Combo Hurricane Horse, a top five title in the land base, as well as strong performance from games like 8-8 Fortunes, Gingy Bouncy, Dancing Drums Explosion, and Marvelous Mouth. And coming up next is the launch of Carnival Cow and Terrific Tiger, further extensions of our successful Coin Combo franchise. Turning to international, we saw a sequential rebound in the business thanks to gains from our evergreen franchises like Rainbow Rich's Rainbow Frenzy and Blazing Hot 7's Big Bonuses. And this quarter also saw us launch in Ontario, our largest ever single market launch. Finally, we continue to be excited about our PlayZito acquisition, where they have strong momentum, having completed over 30 operator integrations since we closed on the deal. And we're seeing strong interest from operators as they look to launch more exclusive content. Overall, it was a great quarter. And looking forward, our investments in the first half of the year have set us up for continued growth in the second half as we launch more games. And in Q4, live dealers. Let's now turn to Sideplay, who turned in a solid second quarter outperforming the social casino market both year over year and sequentially, along with making good progress towards our expansion into casual. Growth was driven by our major games, with Quick Hit achieving its second consecutive quarterly revenue record, while Jackpot Party delivered one of their top quarters of all time. Further validating that Sideplay's scaled evergreen games and sticky cohort base puts them in a great position to achieve their full monetization potential. Looking ahead, we're seeing momentum in Sideplay's business build in the third quarter with the launch of a number of new features and tools and their largest gains. In fact, July was the second highest revenue month in our history for social casino, second only to our peak revenue month achieved during the height of the COVID pandemic. Our expansion to casual continued momentum with the successful integration of Elictus, a passionate and talented team that launched a number of new games in the quarter with solid engagement metrics. We see an opportunity to maximize this acquisition by leveraging our expertise and capabilities, such as adding new meta features to drive higher LTV. Additionally, our new casual games portfolio continue to make progress. The newest version of the Solitaire's Pets adventure is in soft launch, and we have some early positive data. Meanwhile, Spellspinner from our talented team in Finland remains on track for a soft launch in the fourth quarter. All in all, Sideplay is a durable, highly cash-generative business. And even as we have delivered significant gains with revenues growing 36% over the past three years, we think there's even more upside in the business going forward. Fueled by their evergreen franchises, sticky cohorts, and disciplined approach to investing and monetizing their players. One more thing I want to highlight. All the success we're seeing across all three business units is enabled by our high performance culture and top talent. As evidenced recently by bolstering the product and design talent in the Australian market, which was a key catalyst in our share gains this quarter. We're also pleased to welcome Victor Blanco as our Chief Technology Officer and Roxanne Lucas as our chief people capability officer, both of whom have deep games, technology, and digital experience as we continue to enhance our executive team. Additionally, we appointed Steve Morrow as our new director to our board, effective today. We are fortunate to have Steve, who draws from 35 years as a supplier, operator, and regulator in the gaming industry. To sum up, Following another quarter of transformational and operational performance, we have never been better positioned to deliver tremendous value to our shareholders. I've shared some highlights of our organizational and operational progress. And now, for more detail on our financial progress this quarter, let me turn it over to Connie.