Light & Wonder, Inc.

thank you for your patience the light and wonder 2022 third quarter investor conference call will be starting shortly Welcome to the Light and Wonder 2022 Third Quarter Investor Conference Call. At this time, participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. To ask a question, please press star 1 on your touch phone keypad. And if you change your mind at any time, please press star 2. And for operator assistance at any point, please press star 0. Thank you. Now, let me turn the call over to Jim Bombassi. Senior Vice President of Investor Relations for Light and Wonder. So, Mr. Bombasi, you may begin.

Thank you, Operator. Good afternoon, everyone. During today's call, we will discuss our third quarter 2022 results and operating performance, followed by a question and answer period. With me today are CEO Matt Wilson 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 this 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 closed the transaction on September 30th of this year. During the second quarter, we completed the sale of the lottery business to Brookfield Business Partners. Accordingly, we reflected these businesses as discontinued operations in our consolidated statement of operations for all periods presented. We are reporting our results of continuing operations in three business segments, gaming, side play, and iGame. 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 of our website at www.lnw.com. And now I'll turn the call over to Matt.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us today. It's great to be here with you on my first earnings call. I'm excited to have taken over the reins at Light & Wonder. and honoured that the board has placed its trust in me to lead the company on its journey to becoming the leading cross-platform global games company. We have a unique collection of assets that is at the core, powered by game technology and our amazing team. I'm focused on continuing to build on our great momentum and capture the incredible opportunity in front of us. We have undertaken an extraordinary transformation to evolve our portfolio that clearly positions Light & Wonder to lead the cross-platform future for our customers, and our players. This quarter demonstrated the clear progress we are making strategically, operationally and financially. I want to congratulate our teams for their passion, continued focus and dedication. It is this commitment that enabled us to achieve a number of key milestones and provides us with a strong foundation for our future. I'm very pleased with our performance this quarter and this year. We are successfully executing on our key initiatives and robust roadmap to unlock our full potential. Turning to the quarter, we closed the sale of the sports betting business, which marked the final step to streamline our organization and further strengthen our balance sheet, enabling us to achieve a net debt leverage ratio at 3.1 times at the end of the third quarter, squarely within our target range. This financial strength and flexibility enables us to further advance our capital allocation priorities, returning capital to shareholders through our share buyback program and investing in our core growth areas. To that end, Through November 4th, we repurchased a total of $241 million or $4.4 million of our shares under our $750 million three-year share repurchase program, or over 30% of the total authorization since we implemented the program in March of this year. With the heavy lifting done around the transactions and the balance sheet, we are now a rebranded company with three complementary business units and our R&D engine at the center of our universe. With a sharpened focus and a clear roadmap to win, we are executing on our growth strategy to take share. Key to this is our deep understanding of players and customers and what makes great games. That's why we've bolstered our R&D engine over the past couple of years and enhanced our world-class game design talent. The launch of Studio X is a great example of this, and we received overwhelmingly positive feedback on their first game showcase for G2E, Dragon, and Frankenstein. It is the scale and scope of our R&D engine that provides us with a key competitive advantage. And now our firmly established financial strength enables us to invest in our future through various economic cycles. With games and platforms at our centre, we are harnessing one of our key competitive advantages, robust data, analytics and play insights from across the organisation to enhance our game product roadmap and our success. Importantly, we continue to look at ways to advance our business as we invest in our future. With the announcement of our most recent asset acquisition, House Advantage, we are reinforcing our commitment to our systems business, and with John Wolfe now heading the group, cementing our leadership position in systems and our ability to chart the future in the increasingly converged gaming industry. Now let's turn to quarterly results. Overall, we delivered strong double-digit top and bottom line results year over year with consolidated revenue growth of 20%, and consolidated Aebitda growth of 16%. We made great strides investing in our product roadmap as we scaled our original content launches across our businesses. We achieved strong performance from a number of our new games and saw continued share gain. Importantly, despite macroeconomic uncertainty, we continue to see strong GGR levels as we benefited from a resilient LAN-based gaming industry, successful product roadmap, and continued strong performance in our iGaming and Sideplay businesses. And now let's go into the performance of each business unit. In gaming, we continue to build on our momentum, making great progress and delivering gains in each business line. And with competitive cabinets in each critical segment, enhanced systems and table offerings, we are well positioned to benefit as operators continue to invest in their floors. Our North American premium install-based brew for the ninth consecutive quarter and now stands at a record 45% of our North American install-based mix. Revenue per day increased approximately 7% year over year and remained on par with second quarter levels, reflecting the resiliency of the gaming industry. Looking at the most recent iOS research, we continue to hold the number one spot in premium leaf segment with our game Ultimate Firelink Explosion. Moving to game sales, growth was driven by increased unit sales in both North America and internationally, as we shipped over 7,200 units globally, up 45% year over year. demonstrating our ability to continue to meet the increasing demand from operators while successfully navigating the global supply chain. From a content perspective, in North America, we took two of the top five spots in the new core game rankings in Islas with Huff & More Puffs and Goldfish Feeding Time Castle. Moving to Australia, we have seen a remarkable three-fold increase in our ship share over the last 18 months, which now stands at approximately 20%. We hold the top four games in Queensland, which is a company first, led by our leading title, Dragon Unleashed. In our systems business, North America machines connected to our network have grown sequentially since the first quarter this year, and with our acquisition of the Halo Loyalty Solutions platform and other assets from House Advantage, we continue to advance our systems capabilities, enabling the player journey. Cashless was again a topic of interest this year at G2E, and our leading IB4 hardware continues to drive growth in our systems business and cashless enablement. Demand for the IV4 product remains strong, with unit sales nearly doubling year over year, and is now deployed across approximately two-thirds of the slot machines connected to our systems platform. And in tables, we're seeing a broad recovery as we continue to add to our Vault subscription program and saw continued growth in our shufflers and store base. We received great customer feedback on new table solutions displayed at G2E, including the Car Recycler, our RouletteX cross-platform content, and our Shuffler Connect Tables data solution. We occupy leading positions in every category, and that's unique to Light and Wonder, and provides clear competitive advantage. In addition, our gaming business is highly cash-generative, providing the capital to fund investments across our organization. And we couldn't be more thrilled for Siobhan Lane to be named permanent CEO of gaming to continue to grow this business going forward. Moving to iGaming, we have an unrivaled offering for our partners and players. Our LAN-based and digital native content unmatched iGaming platform and leading PAM enables us to participate in every part of the value chain. In the quarter, US growth remains strong with revenue up approximately 39% year over year, driven by overall market GGR growth. We have been ramping up our original content offering in the US with record launches of land-based titles, including Coin Combo, Carnival Cow, Dancing Drums Prosperity and Goldfish. as well as great content from our Lightning Box studio, which continues to post record GGR. In fact, among the top 20 games on our iGaming platform in the US in the quarter, our original content generated approximately 80% of the GGR in this quarter. We will be launching even more digital native content soon as we bring Elk Studios' great games to the US. This combination of both a strong land-based and digital native content offering gives us an unrivaled position in the market as we continue to gain share. We saw year-on-year sequential growth in GGI internationally in all regions. Performance benefited from our regional content roadmap and increased original content launches with strong results from games including Rainbow Riches Piles of Cash, Action Bank Cash Shot, and Stash and Grab, as well as record performance in September from Elk Studios. We continue to be excited about PlayZito, which has completed over 30 operator integrations since we closed on the acquisition, and most recently added partner studio, Avatar UX, where we'll co-develop games and provide expanded content offering to our customers. With Live Dealer, we took a capital efficient approach to enter this important segment of the market, combining the targeted acquisition of Authentic with our proprietary table games IT and expertise. We are actively preparing to go live in Michigan shortly with three major product offerings, Blackjack, Baccarat, and Roulette. Going forward, we are well set up for growth with a number of key initiatives globally, including the continued scaling of our original game launches globally, the ramping of exclusive content for operators, and plans to launch LiveDealer in the US. Turning to SidePlay, we delivered another strong quarter with record revenue performance as we outpaced the market. Our investments in our core capabilities continue to drive enhanced engagement and monetization, helping fuel record quarters at Jackpot Party and Quick Hits. Underlying these results was the quality of earnings, with record up-down, record monthly paying users, and record payer conversion. SidePlay continues to make great progress with their investment to centralize their best-in-class features and capabilities in the SidePlay engine and in their direct-to-consumer platform that they expect to launch this quarter. This all adds up to a stronger position as they gain deeper insights into their players, drive greater engagement and monetization, all pointing to enhancing long-term growth and margin expansion. Adding to this, we are leveraging Ellictus' strong in-app advertising technology across our platform. Ellictus provides us with a head start on our ad monetization capabilities, accelerating Sideplay's ability to further enhance player lifetime value. Sideplay has made great progress this year on a number of key initiatives. It is a highly cash-generated business, and while we have delivered outsized performance, we believe there's considerable opportunity to continue to grow and scale after, fueled by our talented team, evergreen franchises, sticky cohorts, and a disciplined approach to investing. All of this gives me great confidence that our future has never been brighter. Our strategy is in place, and we are taking share with our robust R&D engine, investing class talent. Our strong balance sheet and operational momentum gives us the ability to leverage our leading industry positions, evergreen franchises, and unmatched platforms to drive sustainable growth and significant value. Fostering a high-performance culture and making disciplined investments in our future while maintaining a laser focus on operations and execution will underpin our success. And that will enable us to unlock our full potential and drive greater value for all of our stakeholders. With that, I'll turn it now to Connie to discuss our financial progress for the quarter.

Thanks, Matt. For those who are not familiar with our story, I've worked with Matt for many years, and I'm thrilled to be partnering with him once again as we embark on this exciting next chapter for Light and Wonder. I am incredibly proud of the transformational steps that we've taken over the last 18 months, all while executing on our strategy that leverages our leading positions and platforms to drive sustainable differentiation and growth. Each quarter, we have made tangible progress against our key strategic priorities, And this consistent and rapid execution is becoming the hallmark of our organization. And our teams are the true superstars for making all of this happen, enabling us to accomplish so much. First, we completed the final milestone to streamline our organization with the completion of divesting our sports business, which generated approximately $800 million in gross proceeds. Second, we achieved our targeted net debt leverage ratio range. ending the quarter at 3.1 times, a reduction of nearly 7.5 turns, or 70%, from a peak of 10.5 times at the end of 2020. Third, we continue to advance on our capital allocation priorities, returning a significant amount of capital to shareholders. In fact, we've already repurchased over 30% of the total authorization since March, while at the same time investing in key growth initiatives. Now let's turn to the quarter's financial highlights. Consolidated revenues of $648 million increased 20% year-over-year and accelerated sequentially, driven by double-digit growth in gaming and side play. Net income from continuing operations was $20 million compared to $100 million last year. The prior year reflects a one-time $181 million income tax benefit. The current quarter benefited from higher revenue and lower interest expense. Importantly, the decline in interest expense of $52 million, or 43% in the quarter, was the direct result of the significant actions we took to reduce our debt outstanding. Consolidated A EBITDA of $235 million increased 16% year-over-year and 11% sequentially. The year-over-year results were driven by double-digit growth in gaming and iGaming. Consolidated A EBITDA margin from continuing operations was 36% versus 38% in the prior year period, reflecting continued investments in the growth initiatives at iGaming and SiteLag. However, margins improved 100 basis points sequentially, reflecting a 200 basis point improvement in gaming. While we continue to see adverse impacts of FX movements on reported revenues, our cost base largely provides us with a natural hedge. We saw the revenue impact principally at our iGaming segment, although it did not have a corresponding impact on AEBITDA. On a consolidated basis, FX impacts are immaterial to our results. Now turning to our business segment. In gaming, we saw another quarter of strong performance, demonstrating the success of our products and the resilience of our industry, with revenue up 24% to $419 million, and a EBITDA increasing 17% to $202 million year-over-year. Growth was primarily driven by game sales and systems as we benefited from the increased demand from operators. We saw continued momentum in gaming operations with revenue increasing 7% year-over-year led by growth in our North American premium install base and elevated RPD levels. As Matt mentioned, our North American premium install base grew for the ninth consecutive quarter, up 10% year-over-year, and now stands at a record 45% of the total North American install base. With the success of our new cabinets and games, we generated revenue per day of $45.68, well exceeding 2019 levels. Importantly, we also saw continued strong demand for game sales globally, both replacement and new and expansion units. driving revenue growth of 47% year-over-year and 14% sequentially to $140 million. Combined, we sold over 7,200 units in a quarter, a 45% year-over-year increase, underscoring the gains we are seeing from our reinvigorated product roadmap and our ability to successfully navigate the dynamic supply chain environment. Additionally, our systems business continues to scale. growing revenue 35% from a year ago and up 17% sequentially to $70 million, led by continued strong IB4 hardware sales and an increase in our systems connections. And in table games, revenue increased 17% year over year and 9% sequentially as we saw continued rebound across all product categories. We are incredibly pleased with the continued execution and progress we are making in our gaming business, and feel great about our ability to drive long-term share gains and growth. Turning to iGaming, reported revenue increased 9% to $58 million compared to a year ago, and 8 EBITDA was up 11% to $20 million in the quarter. Importantly, on a constant currency basis, revenue increased 19% year-over-year. Year-over-year growth was primarily driven by the U.S., where we saw market expansion and strong performance from original content launches. leading to record GGR on our platform. In fact, we have seen eight consecutive quarters of GGR growth in the U.S. on our iGaming platform. In constant FX terms, internationally in the U.K. and Europe, GGR on our iGaming platform grew both year over year and sequentially as we continue to benefit from our regionalized content roadmap and the acquisition of Elk Studios. Our A EBITDA margin was 34% as we continue to invest and expand our original content offering on our platform and as we prepare to launch Live Dealer in Michigan. Overall, we feel great about our iGaming business with our leading position and ability to continue to scale with our unmatched product portfolio. Moving to SidePlay, our strong performance continued as we achieved an all-time quarterly revenue record. with revenues growing 17% year-over-year to $171 million and 7% sequentially. Importantly, our social casino business grew double digits year-over-year and once again outpaced the market based on the most recent EILER's report, contributing to the majority of the growth we saw in the quarter, along with the elixir's acquisition. SidePlay's performance was underpinned by a number of key records, including ARPDAL of 80 cents translating to growth of 16% year-over-year, an all-time high payer conversion rate of 9.7%. A EBITDA of $43 million and a quarter reflects our investments in growth initiatives, including our cycling engine, the upcoming launch of the direct-to-consumer platform, and a marketing innovation campaign to drive exposure and scale user acquisition. We anticipate fourth quarter A EBITDA margins will improve to the low 30s as we move past the marketing innovation campaign, which had an approximately 500 basis point impact in the third quarter. Overall, we feel great about SidePlay's business, underpinned by its sticky player base, strong monetization, and low capital intensity. It continues to be highly cash generative, and the investments we are making will enhance SidePlay's platform and ability to drive sustainable long-term growth. Turning to the balance sheet, cash flow, and capital allocation. I'm excited to say that we delivered on our first capital allocation priority, paying down debt and achieving our targeted leverage range. The cumulative gross proceeds of $6.6 billion from the sale of our lottery and sports betting business enable us to make swift and significant progress transforming our balance sheet, reducing our debt outstanding by $4.8 billion or 55% since the beginning of the year. and ending the quarter with net debt of $2.7 billion. Importantly, earlier in the year, we were proactive and took advantage of a limited window in the capital markets to refinance and reduce our debt outstanding and lower the floating portion of our debt mix, which now stands at less than 40% of the total. Additionally, with no debt maturities until 2025 and with significant cash flow generation, our balance sheet is a competitive advantage. We are able to invest in our R&D engine and key growth initiatives, while at the same time servicing our debt maturities, all from our cash flows, regardless of the economic cycle. Turning to free cash flow. Results in the quarter were primarily impacted by an approximately $465 million tax payment related to the lottery divestiture, as well as a $25 million payment for the legal sentiment side play during the quarter. Looking ahead, fourth quarter free cash flow will be impacted by transaction costs related to the divestitures, principally tax payments on the sale of the lottery and sports betting transactions of approximately $175 million. We are firm believers that free cash flow is one of the key drivers of shareholder value, and in 2023, as we move past the strategic initiatives, we will see substantial free cash flow per share as we benefit from our strong growth profile, the transformation of our balance sheets, the flow-through of operational efficiency benefits, and active repurchasing of our shares. With a strength in balance sheet and net debt leverage ratios squarely within our targeted range, we are advancing our capital allocation priorities of returning capital to shareholders and making disciplined investments in key growth initiatives. We've made significant progress returning capital to shareholders. And at current trading levels, we continue to see share repurchases as a significant opportunity to enhance shareholder value. Importantly, we will continue to invest smartly, leveraging our core capabilities in order to enhance long-term growth and bolster our leadership positions. R&D is a key way to do this, and we are starting to see the success in our new product roadmap. As we invest, we are committed to being laser-focused on driving ROI to enhance shareholder value. we will remain disciplined and scale investments to the extent they exceed our return thresholds. With a financial profile defined by strong revenue growth, increasing margins and profitability, as well as scaling free cash flow conversion, we have a strong foundation to enhance returns. Combined with our disciplined lens on capital allocation, this sets us up well to drive returns on invested capital going forward. Wrapping up, I would like to thank our team for their tremendous effort and passion over the last 18 months. We didn't miss a beat and continue to execute strategically and operationally during this period of substantial transformation. The dynamic environment we operate in today validates our strategy, and with our strength and balance sheet and financial flexibility, we have a strong foundation from which to build upon and grow. Important to this is investing in our people, our capabilities, and our future. And the great news is that we have the financial wherewithal to do this over the long term. I couldn't be more energized about what's ahead and the opportunity to continue to work with all of our talented teams around the globe as we continue on this journey. To that end, I'd like to thank Jim Bombasi for his contributions on enhancing our investor relations program and his partnership through this pivotal transformation. I look forward to continue working closely with him in his new role as CFO at Sideplay. With that, we'll turn it over to the operator for your questions.

Thank you. If you would like to ask a question, please press star, then 1 on your telephone keypad. If you change your mind at any time, please press star 2. The first question we have from the phone lines comes from Barry Jonas of Truist. Your line is open.

Great. Hey, guys. Congrats on the transformation. And Matt, congrats on your appointment. Matt, I wanted to really start with you and sort of ask you how you see yourself similar and perhaps different than your predecessor.

Yeah. Hey, Barry. Nice to be with you and nice to get the first question on my first earnings call from someone I'm so familiar with. And it was great to spend some time with you. At G2E, I agree what an incredible transformation this organization has been through. If you think about everything that's been accomplished in the last 18 months from a new strategic vision, a new brand, a new board, a new chairman, new investors, a repaired balance sheet, it's been an amazing journey this last 18 months. Most organizations don't go through this level of change in 10 years, let alone 18 months. So to the creators on the line at Light and Wonder, Thank you for being on this journey with us. We know it's been a lot, but it's all for the right reasons. And I think we have this amazing platform to go forward and execute behind. I want to publicly and personally thank Barry Cottle for everything that he's done for this organization. Barry recruited me to this company with the intention of me potentially being his successor at some point in time. He did a lot of heavy lifting to get us in the spot that we're in. I just want to acknowledge that. Importantly, I was right there alongside him in defining that strategy, so I'm completely bought in to the direction of the company. It makes complete sense to me, and it's very logical. I think strategy will change at the margins over time because markets evolve and things change, so we'll focus on that over time. But importantly, we know who we are, we know who we want to be, and we have a clear vision. We want to be the leading cross-platform global games company. That's the mission. That's the North Star. That's where we're headed. and it's time for us to get on and keep executing against that. I think from my standpoint, where I want my fingerprints to show up on this organization over time is through culture. For all intents and purposes, Scientific Games was a business with five disparate businesses, everything from scratch lottery tickets to sports betting platforms and everything in between. Through this transformation to Light and Wonder, we've become this organization with three business lines under one umbrella, that are essentially very unique businesses, but also very complementary. When you think about the pieces of the portfolio that are left, the land-based business, social casino, and iGaming, they're all linked together by this idea of building great games and great technology. So you can see they're unique, but very complementary. And I think the way that my fingerprints will show up over time is that we'll have these teams working really closely together and really unlocking the portfolio collectively. So that's That's really how I think you'll see my impact show up over time. But it's been an unbelievable transformation. I feel like we have a platform now with all the distractions out of the way for us to just get on and execute and unlock the full potential of the business.

That's great. Thank you for that. And just as a follow-up question, there's a lot of uncertainty in the market today, but operators through Q3 earnings are generally talking about stable trends. How is that translating to your outlook and more specifically your visibility?

Yeah, great question. It was great to be with operators at G2E just a few weeks ago, and I saw you there as well. And the tone was unbelievably optimistic, really. I think it goes back to this idea that the gaming industry is recession resilient. I think we're seeing that in the numbers. We watched closely the operator earnings last week. And kudos to them. They've got very healthy businesses at the moment with great momentum. We rely on our operator partners to be successful. So we tip our hat to them and the success that they're having. I think in speaking to operators and CEOs in particular, the sentiment, it is positive. We're looking at all of these macro trends, looking at all the KPIs and data, and it's pointing to the industry being really resilient. And I think this goes back to this idea that this macroeconomic environment is being discriminant in the way that it affects different sectors. There's many sectors out there that are facing huge headwinds. But if you look at every KPI that we look at both internally and externally, it's pointing to a good amount of optimism in our specific industry. I think we're coming off the back of two years of pretty chronic underinvestment. So if you think about from a CapEx standpoint, 2020 and 2021 were historically low levels of CapEx. And I think if the pandemic taught us anything, it taught us that the economic engine of these casinos is the flop floor. And I think operators are seeing a dollar of investment in CapEx on a casino floor is the best way for them to deploy their capital at the moment. So I think that kind of underpins the optimistic outlook from a CapEx perspective. And that's translating into great results. I think you'll see the numbers here. We're up 45% year on year from a new unit perspective, which I think is a great result. And then we're seeing a strong funnel into Q4 and beyond. And I think Importantly, we have an improved portfolio to take full advantage of that kind of refresh capex cycle, and we're ready to fully optimize that. So that's my view on the macro.

That's great. Thank you so much, and congrats again.

Appreciate it. Thank you very much.

Thank you. We have our next question from the line of David Katz of Jefferies. Your line is now open.

Hi, afternoon, everyone. Thanks for taking my question. Just going back to the analyst meeting a while ago, you know, we have a, I believe it's a 2025 target out there. Can you help us think through or share your thoughts on the trajectory of earnings to get there, right? You know, could we see something where the growth is modest for another year or so and then a sharp increase? You know, what do you think that trajectory might look like?

Yeah, thanks for being with us, David. Yeah, so I think back in May in New York, we set out some very clear targets to 2025. I was a part of that strategy. I submitted the gaming numbers in particular for those 2025 targets. I'm feeling really convicted about our path to get there. I've spent the first five weeks in the CEO seat reviewing those targets and reviewing the path to get there. And I do see a clear pathway there. to getting to those targets and feeling pretty convicted about our ability to execute it. Connie, anything you want to add to that?

Yeah, absolutely. To echo Matt's sentiment, we're absolutely committed to the 1.48 EBITDA target and have a lot of confidence in our ability to execute. Just in terms of the phasing, David, and how we get there, in gaming, as the market continues to recover, we expect to see that business start to exceed 2019 levels primarily driven by our share growth story. The great news is we're seeing some real strong momentum in that business off the success of the breadth and depth of the product portfolio. In iGaming, we're really excited to launch Live Dealer. We know that'll be a key catalyst for us going forward. And also, we know that it's just a matter of time until we see the proliferation of iGaming expand across the U.S. Couple that with our real focus on launching first-party content through that distribution channel. That should provide strong double-digit growth for us. At 5Play, wow, what a quarter it had. We've had this vision of investing in that business and really starting to close the gap in terms of ARPDAU. We had a record this quarter at $0.80, and we know there's still significant headway in order to get to the leading levels that we see from our competitors. That said, we also know that there is room for margin expansion. We're going to go live with our direct-to-consumer platform here in Q4. which just adds to that bottom line. Wrap that up with a number of operational efficiencies that we're driving to manage and improve margins. That essentially ladders us up to the 1.4. But you should continue to expect double-digit growth for us year over year.

Understood. And if I may sort of follow up, R&D efficiencies is a terminology that's been used quite a bit. Can you just talk a bit more about how that works and what kinds of efficiencies you're getting and just let us inside a little bit on what you're getting at with R&D efficiencies, please?

Yeah, absolutely. Let me open with that, and then I'll let Matt add on to some more of the strategic programs he's really chairing at the moment. At the core of the business, you hear Matt say it all the time, is really this R&D engine. And we know our great evergreen franchises really resonate across all three of our distribution channels. Historically, we've had a really fragmented approach to the way that we build products. Now we're working collectively as an organization to make sure we can take those great brands and push them across the portfolio. We've really also looked at the ways in which we invest to grow. We know R&D is critical in order to do that organically. We've pegged that at about 10% of revenue, give or take. But rest assured, we make sure that every single dollar we spend is in the right channel, driving the right level of return. But Matt, maybe you want to talk about some of the cross-platform work?

Yeah, I think this goes back to the idea that we were five disparate businesses across lottery and sports and games and technology and everything in between. And the dollar of investment in scientific games was spread across those five businesses. Now we have these three businesses that are very complementary. So a dollar of an R&D investment that goes into the engine, builds games that we can deploy on the slot machines on gaming floors. You can take that and tweak it, put it into the social casino universe through site play. You can tweak it again and put it into the iGaming universe. So every dollar that we push through that engine, now we can monetize across the three very complimentary businesses. We made two very unique and specific hires. Rich Schneider, who drove a lot of the product success that we saw in a major rival across both the digital businesses and land base. So he knows how to unlock that full potential. And we're doing a lot. We had a best games workshop about six weeks ago in Southern California where we had every game designer from each of our businesses in a room talking about the roadmap of the future. This is something we had never done as a business before, but now with the streamlining of the organization, we're able to really harness and focus that energy on building content that we can quickly deport across the different businesses. The other I want to mention is Victor Blanco, who's our CTO. He has a mandate to come and drive some efficiency across our platform, and we're currently investing in a cross-platform platform, which will allow us to build a game and take it very efficiently across these three markets with very little redundancy. So you'll see that kind of run through the P&L over time. But again, these businesses that are in our portfolio, they fit together. So a dollar of investment, we can monetize across the breadth of the portfolio.

Thanks very much. Very helpful. You're welcome.

Thanks, Stephen. Thank you. We now have the next question from Ryan Figdell of Craig Callum. Please go ahead when you're ready.

Hey, this is Will for Ryan. Thanks for taking our questions. First, I wanted to touch on LiveDealer. You, of course, gave a little update about Michigan there, but we were curious on any further updates on progress or launch plans, and what was sort of the interest level you saw at G2E from operators?

Yeah, thanks for being on the call, Will. And I'll kick it off and hand it to Connie. But I think LiveDealer was such a natural extension of our markets. We've been the table games leader for over a decade through the acquisition of ShuffleMaster. And so this is the idea of LiveDealer. We're taking all of that expertise and capability into the digital live gaming universe. So under Dylan Slaney's leadership, we made an acquisition of Authentic Gaming, which is an incredible platform in the LiveDealer space. Importantly, we bought a business there with great technology, but also a great leadership team that are completely aligned to our vision and values. It was exciting to have them on the floor at G2E showing the robust roadmap. I think this is a segment of the market that's crying out for competition. We believe that competition is really healthy for markets. It pushes everyone to be better and to do better and to bring value to operators. And so I think with operators, we're pushing against an open door. They're looking for a competitive solution in that space. And we're thrilled to be a part of it. We're actively boots on the ground in Michigan right now, building out our facility. And you'll see that coming to market imminently. And then we have a plan to go to the other iGaming markets beyond that. So, Connie, anything you want to add to that?

Maybe just a couple brief items. To Matt's point, we're really thrilled about being able to enter into this segment. We believe that over time it will be about 30% of the iGaming TAMs We're also really thrilled about just the depth of the products that we have to go live with Blackjack, Baccarat, and Roulette. Importantly, that's about 95% of the turnover in the US, the combination of those products. What I'd also just like to note is that we were excited to enter into this segment. Also, just given the cash flow profile that the business will ultimately create, it'll start to turn positive in 2024 with a great model that's got a blended fixed fee as well as recurring revenue. And as we continue to move forward, these are the types of acquisitions and importantly adjacencies that really do create a capital efficient way for us to expand and grow. So all in all, really thrilled about the progress and look forward to sharing more news with you soon.

Great. Thanks for the detail on that. Maybe one follow-up sort of on G2E. What was the interest in the new games there, and how would you compare the launch pipeline in the coming 12 to 18 months to the prior 12 to 18 months?

Yeah, great question. I felt like G2E was just a great time for the industry to come together, and there was an amazing level of attendance and an amazing level of traffic through the booth. I think evidence of our success at G2E was Isla's put out a survey recently just yesterday actually ranking all of the different suppliers in the space. And as an organization, Light and Wonder had their highest ever ranking as a business. So I think that points to operators buying in to the momentum behind our product strategy. And so I think they're not really just looking at a cabinet or a game. They're really looking at the R&D program and the way that we're architecting our portfolio going forward. We launched two really unique cabinets at the G2E show. One of them was a Cascada Slant. which was really well received, and we're seeing some good momentum behind the order book for that product. But then importantly, we launched the Cosmic Cabinet, which is a premium portrait cabinet, and launching that with Frankenstein and Dragon, and I think that was the first product released from Studio X, a new studio in the portfolio led by Ted Harsey, who's made many games in the industry that have been of Hall of Fame quality. So I think we're seeing that our portfolio getting incrementally better over time. And we now have a very broad array of cabinets in each of the unique segments. And I think the data point that really suggests that we have great momentum is the operators are telling us that through the rankings with the highest ever ranking we've seen at Islet. So feeling really convicted about the portfolio going forward as we move into 2023.

I think the other exciting highlight of G2E was just really starting to see a number of game launches, it will really go across all of our various verticals. I think it came through loud and clear to Matt's point. We are a united company working hand-in-hand to really optimize the product portfolio. So I look forward to, again, sharing some news about those cross-platform product launches that will continue to accelerate over the coming months.

Great. Thanks for taking our questions, and congrats on the transformation.

Yeah, appreciate that.

Thank you. We now have Jeff Stanstill from Steeple. Please go ahead when you're ready.

Hey, good afternoon, everyone. Thanks for taking the questions, and Matt, it's great to be hearing from you in your new role. I wanted to start on the social gaming on SidePlay, if possible. Based on what we see from the market estimates, from competitor results, it looks evident that SidePlay continues to outperform the broader social gaming market. Just curious if you could break down what you see as the main drivers for that outperformance. And additionally, how are you kind of seeing underlying demand from the social gaming player trend Q3 and into October, kind of putting those market share gains aside? Thanks.

Yeah, great question. And we see what you see. I want to start by saying, first of all, what a fantastic quarter by Syplay. So congratulations to Josh Wilson and the whole team in Cedar Falls, Austin, and Tel Aviv, massively outpacing the competitors, which is hard to do in a competitive environment, but they're doing that. And it's a result they should be really proud of. I'm proud of them. And it showed up in a number of material ways. We had record revenue for SciPlay. We had record revenues in Jackpot Party and Quick Hits. And importantly, we had record opt-out, which kind of points to the sustainability of our business in SciPlay. It's all underpinned by these investments, and we've spoken about this on prior calls in our SciPlay engine, which is really about centralizing our best-in-class features and capabilities and then leveraging that across each of the individual games. It's showing up in retention and monetization, and I think the best evidence of that is ARPDAL at 80 cents. So that's double where we were three years ago. And then importantly, we see a path to increasing that ARPDAL over time. We see our major rivals about double our ARPDAL levels at the moment. So that just shows you the capacity for us to continue to show gains in that space. I think also an exciting development for us is a direct-to-consumer platform, which we're launching in Q4, and we'll have a material impact on our results In 2023, we've seen our major competitors launch a direct-to-consumer platform, and it's had amazing success in expanding margins. So, yeah, again, we see what you see. It was a fantastic quarter. I think the job's not done yet. The team's motivated and excited to continue to win and continue to take share over the coming years. So kudos to the whole team at Sideplay. Great.

That's helpful. Thank you for that, Carla. For my follow-up, I was hoping to kind of ask a similar question as Will, maybe a slightly different way. So, you know, you're going to be live in your first state with Live Dealer in Michigan this quarter. You know, how do you think about the timing within a given state to kind of ramp operations? You're launching with three games. You know, what's the cadence of adding more content? And is there any other kind of blocking and tackling needed to kind of get fully up to speed or fully ramped in a given state that we should be contemplating when thinking about the cadence of, of, of that business kind of ramping up already. Thanks.

I'm happy to start. And, um, you know, again, we continue to make really great progress. We're in the final throws, just dotting some I's and crossing some T's, uh, with a number of operators as we look to go live in Michigan, which is really exciting for us. Um, you know, there is a level of, ramp up that you do create from a bit of a bricks and mortars perspective and then really it's just about applying the digital content we have a robust product portfolio as mentioned we're kind of going out with the top three games blackjack baccarat and roulette so we feel really well positioned you know i think as you think about us expanding into other states we see some real opportunity in particular as you look at the second half starting to ramp the great news as Matt mentioned is that Dillon continues to really see significant partnership opportunities with a number of operators as they continue to look for ways to differentiate their product portfolio. It was amazing when we actually signed this deal originally, the number of inbound calls that we had saying, thanks so much. Taking your IP, putting it on a digital platform, we think there's a real value creation opportunity. So excited to get in the market here very quickly and importantly scale throughout next year.

Yeah, I think you covered most of it. It's a scalable platform and a scalable product solution. So it's really about opening up the bricks and mortar facilities and we've got line of sight to do that. And we do it in a very capital efficient way. So we recruit a lot of the upfront capex through the deal structure with... with our customers. So you'll see some impact to the CapEx through next year, but it's an efficient way for us to launch that category, which we think is just going to be a massive opportunity for us over time.

That's very helpful. Thank you both. I'll pass it on.

Yeah, you're welcome.

Thank you.

Operator, we have time for one more question.

Thank you. Our final question comes from the line of Chad Bennion of Macquarie. Please go ahead when you're ready.

Hi, good afternoon, Matt, Connie, Jim. Thanks for taking my question. Wanted to start on the system side within the gaming segment. From a dollar and percentage basis, this grew, I think, the fastest year over year in the third quarter. Matt, I believe you mentioned that two-thirds of the units have now been converted to HiveU4. But can you kind of help frame this out just in terms of how high the ceiling can be and then maybe additional software opportunities on the marketing, bonusing? And then also related to cashless, when should we expect to start seeing some revenues from cashless enablement? Thanks.

Yeah, Chad, one of the good guys at gaming. Thanks for the question. Glad to be on the call with you. Yeah, we're seeing a huge uptick in terms of demand for our IV4. That's our cashless enabled in-game hardware. So what you're seeing is... operators investing in their floor to get ready to go cashless. And we're ready alongside them with the technical solutions to make that come to life. We have a number of major customers at the moment. It's about 28,000 units connected to cashless in the marketplace today. And again, different operators at different levels of maturity in terms of where they want to turn that on. But we're right there ready next to them to enable that. So you are seeing that hardware kind of flow through the P&L, and we're at elevated levels right now, but you'll start to see kind of more operators switch caches on over time. Connie, anything you want to add to that?

Yeah, it's really exciting. I think our systems business is, to your point, continuing to see really strong growth, and there's no doubt about it. Behind that is the excitement with the iView4 product. I think we've also been able to really focus in ensuring that all of our maintenance revenues are turned back on, which is, again, just a testament of the recovery of the business. As we look forward, we were really excited also to bring on John Wolf into the portfolio. He's a real innovator in this space, and we want to continue, and we will maintain that number one position in systems, innovate accordingly, and we're excited about the opportunity to continue to grow the business.

Yeah, I think that speaks to our level of ambition in the systems business. John is an amazing leader. He's had great success in the market. He's a guy that's been working on converging all of these different entities within a casino operators organization, whether it's a sports platform, iGaming, Lambase. He's built a loyalty solution that sits on top of a casino operators system. So thrilled to have him. He's been in the business about five weeks now. He just spent the last two weeks in India working with the systems team. So I'm encouraged about him.

What John can do for our business and I think systems is set up for success into the future That's great, thanks for all that color and then Separately Connie wanted to ask about the balance sheet I think interest expense you said about 40% of that debt is is floating there were some moving pieces within the quarter and as we try to kind of bridge to a free cash flow number for next year, can you kind of help us just think about interest expense and then also on the cash taxes? Do you still have NOLs after these sales? Any help there would be great. Thanks.

Yeah, absolutely. And let me take that kind of in two parts. First, let me just start to say and congratulate the team that we had set out for really embarking on a capital allocation strategy, and the first priority being to reconstitute the balance sheet. And with the proceeds that we now had delivered in the quarter from the fourth semester, we're right there. In fact, we were incredibly pleased to be able to report the three-point times that leveraged squarely within our range. If you look at our debt mix, we're sitting at about 62% fixed today and 38%, which is floating, inclusive of our fixed rate slop. For modeling purposes, Chad, I think the way to think about it is we'll pay about $190 million of interest annually on the fixed portion of the debt. And then at current rates, on the $1.5 billion of the floating rate debt, it'll equate to about $100 million of interest expense annually. I think some of the good news here too is that in terms of the refinancing, we don't have any maturities coming due before 2025. And also, you know, we've nearly doubled our weighted average maturity of debt from 2.8 years in Q1 to 5.5 years. So we've got a really healthy balance sheet. We see that almost as a competitive advantage allowing us to invest in the future. To your point on free cash flow, we continue to believe free cash flow and free cash flow per share more broadly is a real key metric to drive shareholder value. We're absolutely committed. leave their focus on it. And as we've streamlined the organization and importantly repaired the balance sheet, we're in a good position to yield significant cash. To your point on the tax payments, in the short term in Q4, we're going to have a few large payments in association with the divestitures. In particular, you'll see about $210 million of outflows next quarter. And then shifting into Q2 in 2023, there'll be circa $43 million and that should conclude the tax payments associated with the divestitures. And then looking forward, post those large payments, we'll expect free cash flow to scale to more normalized levels as you start to look towards the second half of 2023. I'd also say that we're really focused on ensuring that we drive a strong cash conversion cycle, so everything we can do operationally to make sure every dollar that's created, that there's a large percentage of that that flows not only to the bottom line, but also to cash.

Yeah, I think just in closing there, I think this speaks to the level of transformation. Yeah, the level of transformation that we've been through, you know, scientific gains of the company at one point, 10 and a half times levered. We're now squarely within the range, 3.1 times. We're focused on generating shareholder value through free cash flow per share. You do that by taking share, optimizing your business, but also being prudent stewards of capital management. So we intend to do that. So thank you everyone for being on the call.

That ends our Q&A session. I'll turn it back to the operator.

Yeah, thank you. Thank you. I'd just like to say thank you all for your time and your support. The quarter was a great testament to the progress we are making and the energy and dedication of our teams who are focused on winning. Our financial strength combined with the nucleus of a robust R&D engine and best-in-class talent sets us up well to execute robustly on our strategy and product roadmap to continue to gain share. As a leader focused on operations, execution, and value creation, I am committed to building on our strong momentum and enhancing value for all stakeholders. Finally, I'd just like to say to all Light & Wonder creators, thank you for your support in my short time in the role as CEO. I want you to know from me to you, you are appreciated.

Thank you, everyone, for joining us on this call. We'll turn it back to the operator for final comments.

Thank you all for joining. The call has now concluded. You may now disconnect your lines.