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spk07: Hello, and welcome to the Scientific Games 2021 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. To ask a question, you may press star then 1 on your touchstone phone. To withdraw your question, please press star then 2. Please note, today's event is being recorded. Now, I'll turn the conference over to Jim Bombassi, Senior Vice President of Investor Relations for Scientific Games. Mr. Bombassi, you may begin.
spk10: Thank you, Operator, and good morning, everyone. During today's call, we will discuss our second quarter 2021 results and operating performance, followed by a question and answer period. With me this morning are Barry Cottle, our CEO, and Mike Eklund, our CFO. 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 morning, 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 press release as well as the investor section on our website. On July 15th, we made a proposal to acquire the remaining 19% interest in SidePlay that Scientific Games does not currently own. We cannot comment further on that proposal at this time. 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 scientificgames.com. Also, supplemental reference slides are available on our investor relations website. These slides are meant to facilitate your review of the company's results. Now let me turn the call over to Barry.
spk11: Thanks, Jim. Good morning, everyone, and thank you for joining us. We're excited to be here today to talk to you about our great progress, including what we've achieved over the past year and our path forward to unlock significant value. What a difference a year makes. A year ago, with the onset of COVID, we experienced significant headwinds in our business. But with the focus and dedication of our great teams, We emerged from the pandemic a much stronger company with significant momentum across all of our businesses. Together with our new board, we recently announced a strategic action plan to transform our company, taking decisive steps to move from a holding company to a company singularly focused on building great games cross-platform. People love to play games, and there is a huge TAM which we are uniquely positioned for. We're moving rapidly with plans to divest our lottery and sports betting businesses, streamlining our organization, and accelerating our efforts to deleverage and invest for growth. No company will be able to match our ability to build great games and franchises fully cross-platform. On our last earnings call, we outlined for you our three strategic pillars, and we're making great progress executing on them to unlock significant shareholder value and become a sustainable growth company. First, we're moving quickly and thoughtfully to optimize our portfolio. We're very encouraged by the discussions and the strong interest we're seeing across the board for our lottery and sports betting businesses. We continue to believe the tremendous value in these businesses is best unlocked by divesting them, and we see multiple avenues available to do so. And as you know, on July 15th, we made a proposal to acquire the remaining 19% equity interest in SidePlay that Scientific Games does not currently own in an all-stock transaction. Second, we are investing in our largest growth opportunities, both organically and inorganically, in content and digital markets to accelerate growth. In gaming, we focused our R&D spend, enabling us to build great games like Monopoly Money Grab, Coin Combo, and Dancing Drums Prosperity. which have helped propel our North American GameOps revenue to surpass 2019 levels and also helped fuel our performance at SidePlay and Digital this year. We recently made smart, targeted investments to accelerate our strategy from Lightning Box to Kukoi to our new Las Vegas iGaming studio, and you should expect more of these investments over the coming months. And third, we're focused on significantly delevering and transforming our balance sheet. as we continue to make great progress organically. We reduced our net debt leverage from 10.5 to 7.2 times, or by nearly one-third in just six months. We are confident that we're on the path to continued significant delevering as we pursue strategic alternatives for our lottery and sports betting businesses. We did what we said we were going to do, and we're just getting started. Now, turning to the results, what an amazing quarter we had. We delivered phenomenal growth with total company revenue increasing 63%, AevaDA more than tripling versus last year, and strong sequential growth. Remarkably, we generated a number of all-time company records, including our highest quarterly AevaDA ever and our highest year-to-date free cash flow ever. And we delivered progress in important areas that demonstrate a clear structural turnaround at gaming. and clear momentum across our businesses. Now let's turn to our businesses. In gaming, we continue to see great progress, with another successful quarter building on our momentum and growing share in our largest profit pools, the North America Premium Ops Market, North America For Sale Market, and the Australian For Sale Market, while continuing to maintain a leading market position in systems and tables. This success was driven by the strength of our new product roadmap the strong recovery in the U.S. market, including record GGR, and rebounds in UK and Europe following their market reopenings. The foundation for this success is built on our strategy of having the best talent and enhancing our existing talent with executives like Rich Schneider, who will help champion our vision and drive collaboration across our businesses. This strategy is already paying huge dividends. There's no better proof point of the enormous progress we're making than what we saw this past quarter in gaming operations. Total North America gaming ops revenue exceeded 2019 levels with an improved install base mix as we benefited from the Cascada cabinets and higher average daily revenue. Our North American premium install base grew for the fourth consecutive quarter and is also now above 2019 levels. The success of Cascada continues to build, with great games like Coin Combo, Ultimate Firelink, and Monopoly MoneyGraph. Cascada has reached over 1,000 active units in our gaming operations install base in less than half the time of our most successful cabinet in recent history, the J43. Cascada is already in nearly 50% of our customer base. And on the back of the successful launch of Cascada in late Q2, we launched the mural cabinet with games like Willy Wonka, Dreamer of Dreams, and 88 Fortunes, Emperor's Coins. With our three-year plan, we had a strong pipeline of cabinet launches scheduled throughout 2022 and 2023. And on top of this, North American sales accelerated with improved capital cycles in the U.S. market and our new products like Cascada. enabling us to sell over 3,200 units and grow our Class III ship share meaningfully in the second quarter. This success is carrying over to the Australian market, where we are seeing early momentum underpinned by an improved product portfolio with the Kraken Unleashed family, which is our best-performing franchise since 88 fortunes. Turning to our systems business, we have embarked on a modernization program to enhance the success of our cross-platform strategy. and provide a seamless player experience. In our tables business, we're continuing to focus on innovative products, seeing success in growing our vault offering, which is a subscription-based bundled service, enabling our customers access to unlimited world-class table game content. Gaming is a key part of our new organization and strategy going forward, and its demonstrated success this quarter is confirmation of the great opportunity that lies ahead for this business. and its ability to drive shareholder value. Moving to lottery, the team delivered another record quarter of revenue in A.E. Vedat, along with strong sequential growth, fueled by record instant retail game sales in the U.S. and a number of markets globally, strong draw games performance, and continued momentum in iLottery. The instant lottery business continued its strong run, with US calendar year-to-date instant game sales up 21% over last year, and up 30% versus 2019. Internationally, our Italy instant product JV achieved record performance, up over 20% year-to-date versus last year, which was the previous best year-to-date sales ever. Our lottery business continues to be the market leader, And importantly, we have preeminent market positions and long-term client relationships, with our largest customers having been with us for more than 30 years on average. We've been able to build on our success and accelerate our growth with our unique technology and IP, enabling us to provide unparalleled products and services that are revolutionizing the way lottery products are sold globally across retail and digital. This leadership position was strengthened with a number of key gains in the quarter. First, we were announced the winner of both the instant gains and lottery systems contract for Pennsylvania. This is a huge win. They are one of the top performing lotteries globally, and we couldn't be more excited to continue to partner with them for the next 10 years, as we've done for nearly 50 years. Second, we extended our New Hampshire lottery partnership for six more years. and importantly, upgraded them to a Scientific Games Enhanced Partnership, which brings our U.S. SGEP partners to 14 and our global partnerships to over 20. In addition, we secured three European instant contracts in the countries of Bosnia, Denmark, and Georgia. In iLottery, we continue to be a leader and innovator as partner to 21 iLotteries globally. A great example of this is our Pennsylvania iLottery program. which continues to evolve and thrive, hitting over $2 billion in Q2 in total wagering since inception. The fastest iLottery program to reach that milestone. We went live with a new iLottery program in Germany for Lotto Rheinland Fall, launching digital instant games with a shared prize pool, creating a great cross-platform experience with our retail and instant games. With the U.S. iLottery market estimated to grow fourfold to 11 billion by 2025, our iLottery business has many years of high growth ahead. During the pandemic, over 20 million new players in the U.S. tried instant scratch games for the first time. And with the average instant selling price climbing to all-time highs, more consumers are playing instant lottery than ever before, and they're spending more each time they play. With Lottery's long-term customer relationships, its strong recurring cash flows, a demonstrated resilience in downed markets, and with multiple growth drivers ahead, Lottery is a truly unique business, poised to deliver outsized returns for many years to come. Now turning to SidePlay. On the back of a strong Q1, SidePlay delivered sequential growth in the second quarter on both the top and bottom lines. with the second highest quarterly revenue ever, trailing only the COVID-impacted Q2 2020. SidePlay continues to execute extremely well in its social casino business, hitting another record performance for Goldfish and launching a new version of QuickHits, while continuing to improve payer metrics. SidePlay's payer focus and live ops strategy, powered by the SidePlay engine, enabled us to achieve record ARPDAU of 72 cents and record payer conversion of 8.5%, the sixth quarter in a row of increasing payer conversion. And importantly, monthly paying users and average monthly revenue per user remain well above pre-COVID levels. SidePlay is accelerating its evolution, moving aggressively to expand in the $20 billion casual genre with the launch of Solitaire Pets Adventure, and the development of a new casual game, Project X. With the acquisition of Kukoi Games, Project X will have a full team with years of casual game development experience driving its expected launch in the latter part of 2022. Switching to our iGaming and sports betting businesses, our strong momentum continued as we delivered another record quarter of digital revenue in A.E. Bada, while enhancing our capabilities and scaling our offerings further differentiating us from the competition. iGaming's record quarter was driven by the strong performance of our original content offering, record US GGR, the successful launch in Michigan, and a growing share of the US market. In the second quarter, we grew our US revenue 106% year-over-year, while growing our US share to 25% in the states we are live. A key differentiator is the breadth and quality of our content offering, providing our partners with over 3,000 titles and an unparalleled level of high-quality must-have content. The integration of our iGaming platform with the market leaders increasingly makes us an essential partner for both operators and content studios. Our recent deal with Playtech is a great example. In terms of must-have content, Players have an affinity for land-based franchises they know and love, and we have an unparalleled offering, led by our original land-based franchises, including games like 8-8 Fortunes, the number one game in the U.S., Rainbow Riches, which is a standout in the U.K. market, and our Monopoly-themed games, which drive performance globally. To underscore this point, we recently launched Gingy Bougie in Michigan, and it has been our most successful game launch since our initial entrance in the market. In fact, our original games generated close to 40% of our GGR in the US in the second quarter. The demand for great iGaming content is growing, and we are expanding our studio capacity to meet this demand. We recently acquired Lightning Box, which is a top performance studio in the US market, and just launched a new iGaming studio in Las Vegas. which will be focused on developing games from our land-based franchises. And we see continued opportunities to scale with the recent launches of our iGaming platform in West Virginia and in Latin America. In Pennsylvania, with the recent integration with Bandool and with more integrations planned in the state in the back half of the year, including Barstool and Golden Nugget, and with further opportunities on the horizon in Connecticut and Ontario. With the growing pipeline of opportunities as we integrate with new customers, secure partnerships with more third-party studios, and have a strong roadmap of land-based titles going live in the back half of the year, we feel great about the path forward. Turning to our sports betting business, we have an unparalleled position with tier one operators around the world, with the most advanced sports betting tech platform and content, able to support volumes and uptime that are unrivaled in the industry. Our business continued to build on the strong momentum from Q1 with record second quarter results as we grew our U.S. revenue by 205%, and we powered over 100 million bets at the European Soccer Championships. We continued to rapidly scale our U.S. footprint, deploying eight sportsbooks in the U.S. in the second quarter. This included deploying sportsbooks with FanDuel in five states and with Wynn in two states. And post-quarter end, We launched three additional sportsbooks with FanDuel in New Jersey, Pennsylvania, and Virginia, all on the same day. And we now power FanDuel across all of their U.S. states. This momentum continues with more than 30 U.S. sportsbook deployments anticipated for the full year 2021. We are also leaning into sports betting content, an adjacency where we see tremendous opportunity for growth and a real differentiation. We recently acquired SportCast and their award-winning BetBuilder product. With SportCast, fans can create their own bets and define the story of a game. We are moving quickly to integrate SportCast with leading operators and are already live in nine U.S. states. Looking ahead, we see continued momentum at sports with recent legislative progress in the U.S. and with a growing pipeline of opportunities around the world. We have over 40 opportunities globally that we're pursuing. with deals advancing in Africa and South America as we look to expand our footprint in these fast-growing territories. So before I turn it over to Mike, I want to reinforce that we are uniquely positioned with a number of significant catalysts. We are currently seeing continued momentum in our businesses, and over the coming years, we see meaningful growth on both our top and bottom lines. One thing that has been consistently reinforced over the past year is that people love to play games, and we will be clear beneficiaries. And now, Mike will speak to the financial results.
spk06: Thanks, Barry, and good morning, everyone. It is great to be speaking with you today. Before I get started today, I'd like to just quickly echo Barry's comments. What a difference a year makes, and what a year this has been. As an organization, we have accomplished a tremendous amount. operationally, financially, and strategically. Our teams around the globe have instilled a new level of discipline and focus across all of our businesses that's very encouraging to see. It is this commitment to excellence that enabled Scientific Games to deliver the great results we are sharing with you today. Now, before we get into the quarterly results, I wanted to share some thoughts on the intended divestitures of our lottery and sports betting businesses. We continue to move these deals forward at a rapid pace, and they are progressing nicely. I have been lucky enough to be involved in a number of these deals over the course of my career, and I've rarely seen the level of interest that we are seeing in these assets. It speaks to what great businesses they are, the leading positions they hold in the market, and the opportunities that they have in front of them. We continue to believe that there is a tremendous value in these businesses that is best unlocked by divesting them as the results this quarter further confirm. While we are moving quickly, we are also being thorough and thoughtful in the process, These intended divestitures will enable us to continue to materially and quickly deliver the balance sheet while providing us with the dry powder to invest to grow, both organically and inorganically. We look forward to sharing more specific updates with you soon, but the process and the interest we are seeing from the outside confirm we are on the right path to unlock value for our shareholders. Now with that, let's turn to the quarterly results. There are four things I want to highlight for you today. First, our strong momentum that we saw in Q1 continued on into Q2. enabling us to drive exceptionally strong results with revenue growing 63% and Aebida more than tripling year over year. Importantly, all four of our businesses delivered sequential growth in the quarter with total company revenue, excluding a $38 million one-time VAT recovery benefit, was up 16% sequentially, and Aebida was up 27% sequentially, with both lottery and digital achieving another quarter of record results. And our EBITDA this quarter was the highest quarterly EBITDA in our company's history, even after excluding the benefit from the one-time VAT recovery. Our total company EBITDA margin, excluding the $38 million VAT recovery, climbed to 41%, exceeding our margins in 2019. This speaks to what has been a real priority for me and the teams around the world to ensure that more of every dollar that comes in the door drops through to the bottom line. Second, we continue to be laser-focused on managing our balance sheet, delivering $133 million of free cash flow in the quarter. Even excluding the VAT recovery, this was a very healthy free cash flow conversion rate, a real testament to how we are focused on delivering value for our shareholders. Third, we are making tremendous progress delivering, reducing our net leverage to 7.2 times, a reduction of over three turns in just six months. During the quarter, we paid down $150 million on our revolver and another $150 million in July. That makes now $500 million in total since October. And fourth and finally, we continue to be diligent in managing our cost base and are on track for our target of $50 million of additional run rate savings as we exit the year, keeping in mind this is in addition to the $50 million in permanent savings we achieved last year. Now let's turn to the quarterly business unit results. Gaming saw strong growth in the quarter, both year-over-year and sequentially, with revenue tripling year-over-year and EBITDA rebounding to $196 million from a decline in 2Q of last year. On a sequential basis, the business accelerated, with revenue improving by $123 million and EBITDA by $88 million compared to the first quarter of 2021. The business benefited from the strength of the reopening, particularly in the U.S., increased traction with our new product roadmap, and the $38 million one-time VAT recovery item that we talked about. It is very encouraging that the momentum is broad-based, with all business lines seeing year-over-year and sequential growth as markets continue to open up globally. From a productivity standpoint, taking out the VAT benefit, which impacted both the top and the bottom lines, the team's continued focus on driving productivity and efficiency delivered 80% of margins of 48% in the quarter. Now digging into the trends we're seeing and gaining a bit more. We continue to see markets open up globally, with nearly 90% of our North American installed base active, with our UK installed base approximately 60% active, and now up to 95% active in July. With our European installed base, we were two-thirds active in the quarter, and again, post-quarter end in July, we are now approaching 90% active. We also saw very strong year-over-year coin-in at gaming operations. and we saw operator capital cycles improve, enabling global unit growth of approximately 2,400 units sequentially. Looking ahead, while we are keeping an eye on the recent rise in COVID cases and the potential for renewed restrictions, we see continued strength in our KPIs and momentum in the business ongoing through July. With that, let's turn to the lottery. The strong momentum in the business continued, with revenue growth of 27% and EBITDA increasing 42%. enabling the lottery business to post another all-time record quarter. The business grew sequentially, with revenue up 7% and Aebitda up 16% on the back of what was already a very strong first quarter. The margin improvement for the quarter was fueled by the strong top-line growth and very strong performance from our joint ventures around the world. This accelerating revenue growth and margin expansion underscores the tremendous value of the lottery business. As Barry mentioned, with the industry tailwinds we are seeing in lottery, we believe that our long-term growth outlook has fundamentally improved, taking into account the difficulty in predicting how long we will continue to benefit from the COVID-specific dynamics we have seen over the course of the last year. Now turning to Sideplay, we continue to execute extremely well in the social casino business, growing revenue 2% and a EBIT of 4% sequentially and producing our second highest revenue quarter ever. Importantly, Side play is an integral part of our strategy, and with the ability to scale and grow meaningfully, we see a pipeline of opportunities ahead as we invest in the business both organically and inorganically. Now turning to digital, the business continues to outperform, delivering another record quarter with revenue growth of 27% and EBITDA growth of 55% as compared to the second quarter of last year. As a reminder, last year we had certain one-time items in the numbers that impacted the underlying performance of those businesses from a comparison standpoint. If you normalize for these, sports, platforms, and iGaming revenues grew 46% year-over-year and 8% sequentially. Our segment KPI page and our earnings release has the normalized numbers for your reference. While our iGaming and sports betting businesses continue to benefit from industry tailwinds and their increasingly differentiated offerings in the marketplace, We anticipate there will be some impact of the business as restrictions and closures continue to ease. Now let's turn to net leverage, debt, and cash flows. This is an area that is a major focus and where we continue to make tangible and meaningful progress. We continued on our path of strengthening and de-risking the balance sheet, ending the second quarter with net debt of $8.2 billion and net leverage of 7.2 times, which compares to the peak net leverage at the end of the fourth quarter of last year of 10.5 times. We expect to continue to make steady progress, be leveraging organically, given the increasing strength of our business and our focus on productivity. Our weighted average cost of debt was 5%, and we ended the quarter with $1.4 billion of available liquidity, compared to $943 million in the second quarter of last year. As a reminder, we don't have any maturities that come due until 2024. Now moving to free cash flow. We've generated a very impressive $133 million of free cash flow in the quarter and $213 million year-to-date. a continued testament to how the organization is intently focused on driving value for our shareholders. The growth in free cash flow was driven by the strong year-over-year EBITDA performance, partially offset by lower accounts payable balances this year. In closing today, I would just emphasize we are well underway on this journey to unlock value for our customers, for our employees, and for our shareholders, both in the near term as we continue to deliver exceptionally strong results and in the long term as we execute on our new vision and strategy. The path forward for scientific games is differentiated, with a singular focus on building great games and franchises that are fully cross-platform and with a more streamlined and simplified organizational structure. While we are transforming the company, we are also executing with a high degree of operational excellence, driving productivity that is enabled by our extremely talented teams around the world and a high-performance winning culture. I'm very proud of what we've accomplished as a company, not only with the magnitude of the change, but also with the pace at which we are moving things forward. I'm excited about the opportunity that lies ahead. With that, we will be happy to take your questions. Operator, can you open the line?
spk07: Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question today comes from Barry Jonas with Truist Securities.
spk08: Guys, good morning. I know you're limited in what you can say, but can you give any additional color on how the sales process for lottery and sports betting is going and the sort of interest you have seen?
spk09: Thanks, Barry. Before Mike jumps in on that, let me just... First, start by saying we are extremely happy with where we are. We are executing extremely well in delivering record results in Q2 and on the back end of four quarters of growth with continued momentum into Q3. We're progressing well on our strategy and vision to become a leading cross-platform global game company. And also, we're seeing strong interest in our divested assets. Mike?
spk06: Yeah, Barry, good to chat with you again today, by the way. I just want to quickly say something that Barry said, because it is pretty amazing what our digital and monitoring teams are doing. They're running a very, very quality process at pace and also continuing to deliver record results in the quarter. The results for both of them this quarter were just fantastic. On the divestiture side itself, we're encouraged by the discussions we're having externally right now. We're very fortunate in our mind to have multiple viable options to monetize both of these assets. And based on what we're seeing, we believe we're going to be able to unlock some real value for our shareholders in doing so. As we've talked about over the course of the quarter, we're well along in the process. They're all moving at a very rapid pace, as you might imagine. Given the market position of these leading businesses, we're seeing a lot of interest from the outside in at those businesses. We're going to be very thoughtful and thorough in the process, of course, and we've got nice competitive tension, which we're excited about as well. Ultimately, we have high confidence in the ability to make these things happen and bring them to a quick resolution, which should allow us to quickly realize our longer-term strategic vision that Barry has been talking so much about and quickly deliver the balance sheet, create a bunch of dry powder to reinvest and grow both organically and organically.
spk08: That's great. Thanks for that. And then just for a follow-up question, you know, clearly there's been a resurgence of COVID cases with this Delta variant. Can you just give maybe a little more color on what you're seeing in the business in July and beyond?
spk06: Yeah, you want me to jump in there? All right, I'll grab that one too. This is Mike again. You know, it's interesting. It's an interesting question to ask right now. We've had four straight quarters of growth We just hit company-level records in EBITDA and revenue for the quarter. We had lottery and digital both have record quarters, and the SidePlay business just posted their second-highest revenue quarter ever, only following Q2 of last year. So the business is doing really well at the time. It's tough to speculate on COVID and know exactly what's going to happen, but what I can say is through July, we just haven't seen a slowdown yet. In fact, if you look at a lot of the KPIs, including against gaming, with coin-in and active units in the U.S., Europe, and UK, they're all expanding. And July was actually higher than the average for all of Q2. So we feel pretty good about where we are now. I guess what I would say is in the short term, the good news is we found that we've got three businesses that are very resilient and do well even in a COVID-related environment, right? And on the gaming side, we took some pretty tough measures last year to reposition that business from a cost standpoint with great new products that we think We think short-term they're well-positioned to handle whatever the market throws at them. If we were to see restrictions reinstated, what we've also seen is that our players love to play our games, and demand bounces back very, very, very rapidly, and we're seeing that demand in the coin and numbers that we've talked about so many times before. So longer-term, I would just point you to we think we're uniquely positioned with a lot of significant catalysts so that over the coming years we're going to expect meaningful top- and bottom-line growth
spk00: Perfect. Thank you so much.
spk07: Thank you. And the next question comes from Jeff Stantia with Stifel.
spk03: Hi. Good morning, everyone. Thanks for taking my questions, and congrats on another strong quarter. I wanted to start on the gaming ops business, specifically international yields picking up nicely sequentially here during the second quarter. Can you talk broadly on how you see the recovery cadence progressing in your international ops relative to the U.S.? ? Specifically, do you look at land-based gaming ops and product sales?
spk09: Yeah, absolutely. I think, look, the great news here is we're seeing international markets open up. And, you know, as Mike said, people love to play games. And similar to what we saw in the U.S., players are coming back. We're seeing active units, revenue per day, coin in, continue to improve. Just like, again, as we saw in the U.S., and there's just considerable growth pent-up demand for our products. You probably remember back in Q1, UK was completely shut down, but it built up through the quarter and landed at about, I would say, 95% active by June, which is great for us, as you know, because we have around 50% market share there. Europe was approaching 90% active by June, so we're seeing, while Q1 was challenging internationally, in Q2 we saw you know, good recovery in the market. And now we're set up to see a full quarter of that in Q3 as well. So it's great to see the problem. And we expect to see continued gains as restrictions start to loosen.
spk03: Perfect. Thanks. That's a very helpful color. And then for my follow-up, I wanted to touch on the margin outlook for the remainder of the year. Specifically, we have heard some commentary on from some of your peers around supply chain issues. Is this a trend you're seeing or any other potential cost inflation that we should be contemplating for the back half of the year?
spk06: Yeah, I'll take that one, Jeff. This is Mike, and feel free to jump in on the back end, too. I think there was two questions in there. One was the supply chain, and then one was just kind of the margin outlook for the back end of the year. On the supply chain piece, I think what I would say is this. We're obviously aware of all the issues that are out there in the marketplace, and Not just in our industry, a lot of industries, quite frankly. But we think we're well positioned. We are well positioned to meet the demand. And so far, we haven't really missed any revenue or margin to note because of supply chain issues. As you might recall, late last year, we were talking a lot about productivity, operational excellence, and those kinds of things. And we really went after the supply chain really hard. And I think that's got us set up well. coming into this year. We've got a new team running the supply chain within our gaming operations business. They're doing a fantastic job. We have high confidence in them. They're not seeing any issues in Q3. We think we'll be able to meet all the revenue and all the margin demand that comes through there. And then even on the lottery side, what I would say is the lottery guys, they're seeing demand off the charts versus historical levels, and they've been able to stretch the supply chain, meet all that demand, hit these record results that we're talking about. You know, knock on wood, we feel good with where we are on the supply chain right now. We don't see any issues in the back half of the year for that. On the margin side, you know, we had a great quarter in margin this quarter. You know, one thing, just remember, we did have that one-time $38 million good guy for VAT running through the P&L. That was in revenue, it was in margin, and it was in cash flow. So that won't repeat itself, but the underlying business is performing really well on the margin. As you know, we've been focused on the $50 million cost out. We've been focused on another, the $50 million that we already took out last year, we've been focused on productivity, operational excellence. All of those things are really helping the margin profile. I think Q1 is a good place to look for what the trends look like for the rest of the year. There's always going to be some fluctuations quarter to quarter, depending on the mix of business units, the mix of products that we're selling, et cetera. But Q1 is a better baseline to look at for the full year. I hope that got you.
spk03: That was very helpful. Thank you, Mike. I'll pass it on. I appreciate all the color. You bet.
spk07: Thank you. And the next question comes from John Decree with CBRE.
spk02: Good morning, everyone. Barry, I wanted to revisit your prepared remarks. I think you talked a little bit about the North American premium installed base and how that on a couple metrics had exceeded 2019. It's obviously been a focus of yours and the team for a while. I was wondering if you could help characterize how you think that business is ramping. How much is the demand we're seeing on reopening versus how much you're seeing from strategic initiatives that you've put in place already?
spk09: Thanks for your question. I'm actually super excited you asked that because we're really proud of the team and the amount of effort they've done over the last year to put in a great game plan, which includes New roadmap focused on these large profit pools that we've talked about, a new commercial approach. And you're just seeing tremendous progress we're making in that. And it's driven by – there's inputs and outputs, right? And the inputs are great new cabinets, great new games that we just launched at a perfect time in the marketplace as the market's starting to recover. And so, you know, it's early in the journey, but you're seeing the points on the scoreboard, right? So you're seeing the outputs of it, and it is a function of both. It's a function of kind of riding the wave of the market recovery, but it's also, you know, taking share. So if you look at North America premium game ops, as you stated, you know, grew for the fourth consecutive quarter. Now, you know, above 2019 levels on the North American side. You know, we achieved meaningful shift share, selling over 3,200 units. And it's because of the products, right? Cascada continues to break new records. The new cabinet out there hit 1,000 active users in units, excuse me, in less than half the time of the J43. And as you guys remember, J43 was like our most successful cabinet in recent history. And, you know, it's outperforming that. And it's layered on with incredible games. Coin Combo, Ultimate Fire League, Monopoly, Money Grab. And on the heels of that, we launched Mural, which, you know, kind of in a soft launch at the end of Q2. But we have a big, you know, robust pipeline for orders on that. And we got, again, amazing games like Willy Wonka, Dreamer of Dreams, 88 Fortunes, Emperor Coins. So... and a whole host of healthy other games coming on board. So it really is a function of this new incredible team coming in with an approach focused on the large pieces of the market, concentrating on doing what is right, which is building great products that the players love to play. And so we couldn't be more confident in our pipeline of cabinet and game launches that we have planned throughout the rest of the year, as well as in 2022 and 2023.
spk02: That's helpful, Barry, and maybe a tuck-in follow-up on that related to your content studio acquisition recently about Lightning Box. How does that fit into the strategy specifically? Will that support the premium category, and is that content studio M&A tuck-in something that you'll continue to look to do as you continue to focus on content?
spk09: Yeah, so in our vision to become the global game, leading global game company in the world, we are going to take a franchise approach of building great games, great franchises, and then deploying them across land-based, digital, and social collectively. So it's really about looking at it from a perspective of, building these games that then we can leverage across these different groups. And as we talked about, we want to lean in on digital and content. And what Lightning Box does for us is gives us an incredibly talented studio that really builds authentic, what I would call kind of land-based type games, very effectively in the digital space. And they've had very good success there. in the U.S. because of that. And so, you know, if you think about our M&A strategy, you know, we're really well positioned today. The major pieces are in place to achieve it. But, that said, we're looking at content and digital focus acquisitions to help us accelerate because you've got a $50 billion digital TAM out there that we can leverage these great franchises we know players love to play. So, we're already executing. Lightning Box was one example. Kukoi is another example of it. So, really focusing on investing in high-growth areas, bringing in talented, great studios to help us drive and get there.
spk02: Thanks, Barry. It's great to see the strategy really come to fruition. Congratulations on the quarter. Thanks for taking my questions.
spk07: Thanks. Thank you. And the next question comes from Ryan Sigdow with Craig Howland Capital Group.
spk01: Good morning, guys. Congrats on the results. One, and it actually... segues nicely off that last question you just answered, but as you consider potential iGaming content acquisitions, and you can even speak to the lightning box as well, but how much of an advantage is having OGS and access to see real-time game performance, player engagement, et cetera, for not only your own games, but also third-party aggregated content?
spk09: Great question. Let me start by saying OGS is actually an incredible asset that provides a Tremendous value to everybody in the value chain, right? And so if you think about it, we sit in the middle of the digital iGaming space almost as kind of that Netflix, right? So for us, we deploy OGS to the top tier one operators globally, and that gives them access to 3,000 plus games. Studio providers... get great value because they get access to those operators without having to build their own RGS feed and trying to do individual distribution deals. And so we provide tremendous value to them. For us, it really helps us get great insight to what's going on in the marketplace. It gets us in early relationships with these new studios where we're working together to bring their games to market. And so it gives us great insight. But then it also gives us an advantage on the M&A front because you always look for, when you're making acquisitions, the ability to provide upside synergy. And that upside synergy is because of that distribution that we have. We can plug these studios in and give them massive distribution right away as a part of the equation and rationalization around our acquisitions. And so OGS is a tremendous asset for us.
spk01: Then just a quick follow-up. Any financial metrics you can share around the Lightning Box acquisition? Thanks.
spk09: No, right now we're not disclosing the terms of it. It's obviously immaterial from a company organization perspective. Thanks, guys.
spk07: Thank you. And the next question comes from David Katz with Jefferies.
spk05: Hi, good morning. Mike, you know, I know you can't really comment on the process, but I'm wondering, you know, how you're thinking about where you might be able to land, qualitatively speaking, in terms of leverage. Are we thinking that we can land, you know, practically or actually, you know, investment grade? Or, you know, do you have a target in mind that you can help us?
spk06: It seems like I've heard that one from you before somewhere, David, but I'm happy to do it. Always happy to do it. Now, the headline that we've been talking about, again, just to go back to it, is we want to move this quickly from a debt story to an equity story. And we're not waiting until the acquisitions are done to get to that point and get focused on it. We're already making pretty decent progress on leverage. Just to recap what Barry said, we've had three turns reduction so far this year and paid down another $150 million. In the quarter, another $150 million in July, $500 million since October. If you look at the consensus out there for 2021 and 2023, just organically, we get down low six and then low five respectively. All that's before any divestitures on the back end, et cetera. Given how well advanced we are in the process on both lottery and sports and the high confidence we have and our ability to execute, and unlock real value for our shareholders and just the interest we're seeing, we're obviously going to be able to go materially below that. And then once we get materially below that, what I promised Barry is I'm going to give him a war chest of dry powder and cash to go spend on organic and inorganic growth, allowing us to really get the top line humming again and get that digital mix where we'd like to see it over a period of time. So that's the game plan we're executing to. We have high confidence in our ability to do that. I'd probably think about it as a range more than a specific number, just given where we are in that M&A pipeline at any given time. But we're going to do all of that in the context of maintaining a transform balance sheet once we get there and keeping those leverage levels where they need to be.
spk05: Right. And you have not given a range at any point through this process? I have not. You have not. Okay. And if I may just quickly follow up in the spirit that we – you know, repeat ourselves for a living. I know that you've talked about the installed base on the GameOps, and just looking back in my model, it has been, you know, more than four years since we've seen an increase in that installed base, and obviously the win per day, you know, is driven by a lot of the volumes we're seeing across the industry at this point. Could you just give us a little bit more color on, you know, how you got that to grow this quarter and And with respect to the wind per day, you know, how much of that should we think about as sustainable versus, you know, just this sort of 2Q, you know, boon that we're seeing across the industry? And that's it for me. Thanks.
spk09: Yeah, this is Barry. I'm happy to jump in on that. Again, when the new team came in, they took a step back and looked at our product roadmap for the year and all the different markets we were going after and We prioritized the largest profit pools, North America Game Ops, North America Sales, the Australian market, and really did a concerted effort of building products that would go at the heart of those spaces. We took both a commercial approach to that strategy as well as developing great products. what you're seeing is really the launch of our new products and games having a real impact coming out of that focus. Because the Cascada success has led the way in helping us drive that growth that we're seeing, that sequential quarter-on-quarter. And so we're excited about it, and we're extremely confident and optimistic that we're going to continue to build on it. Operator, we have time for one more question. Thank you very much.
spk07: Yes, thank you. And that comes from Chad Bennion with Macquarie.
spk04: Hi, good morning. Thanks for taking my question. You guys have been a leader in the systems business for years. I think at times that business generated over $300 million of annual revenues. Based on your quarterly results, it looks like the recurring piece of that business is really starting to come back. but can you help us think about the systems opportunity going forward and then related to that, how the unified wallet and some of the cashless features are being accepted by your partners? Thanks.
spk09: Absolutely. I'll, I'll, I'll jump in on that one. So, you know, as you, as you talked about, we, um, very similar to some of the other core pieces of our business. We came in, did assessment of it, um, put some new leadership and, and, uh, thinking in place with the real thought of modernizing both the business from a productization perspective, but also from a business model perspective. And we're leaning in on that. Again, as I kind of said on the gaming side, we're still early in the journey, but we're seeing some good progress. The second piece of that is part of the modernization, but also really pushing toward... where the new world is going in terms of convergence and cashless. We leaned in heavy and we leaned in early on cashless. And so we're really, really pleased where we stand there. There's a tremendous amount of momentum, obviously, that was initiated by COVID. As of today, we are live in seven properties with about 13,000 machines connected and anticipate another seven additional partner deployments in the next 12 months. We're also working towards a field trial in Nevada to get approval for cashless as well. But, you know, the core key point that I'll remind you on that one is we are in – we're really, really well positioned here because we're the leading systems footprint with about 50% market share, about 400,000, 500,000 interconnected slots. And because of the deal we did with IGT to get the best collection of IT and technology, that's really required to build and deploy the best solution for really puts us in a great position because we kind of, you know, are in that last mile of connecting the player, you know, to the cashless wallet. And so we're in a prime position there. We've got great team leadership in place, and I really like the approach we're taking to the business. So thank you for the question.
spk04: Perfect. And then unrelated follow-up, Barry, can you talk about the digital margin opportunities in that segment? I guess once the sports business opens, has been divested. Should we assume that the margins in that segment start to increase, particularly given what you've talked about with bringing a lot of the content in-house with Lightning Box and in your in-house studio? Currently, your margins in that business are right around 30%. Should we assume that a lot of the revenue you generate in the years to follow flows through the bottom line? That's all for me. Thanks.
spk09: Yeah, I'll just say at a high level, and Mike can jump in as well, but I think to your point in the iGaming business, one of the things we love about it is we're leveraging this franchise approach that we talked about so we can take the R&D of building a game like 8-8 Fortress and then amortize it across all of our businesses. And it is build once and then deploy globally. kind of a software recurring revenue model and so the margins on the iGaming business are healthy and it's also differentiated because games are not commodities. People love specific games that they love to play. That's why 8A Fortunes is number one in the marketplace today. You build a great game and you can build that market position and so it holds and so at a high level we do
spk06: business I would only add to it exactly what Barry said that business already has a very healthy financial profile today growth margin and a EBITDA and cash flow as you continue to grow and scale it we're obviously going to get some benefit there as well and then the real exclamation point that Barry said that I really like is that content creates margin differentiation which is why we're going after it for a strategy great I'll turn it back over to Barry for some final comments
spk09: Thanks, everyone. Really appreciate you joining us for today's call. We're very excited about the progress we're making and how much we accomplished in the past year. Our strong results demonstrate the clear momentum across all of our businesses and the focus and hard work of the talented teams. We're moving quickly to execute on our strategic pillars to unlock substantial value as we optimize our portfolio and invest in high-growth opportunities and significantly delever. We're excited about our path forward as we transform our company and streamline our organization with a singular focus to become the leading cross-platform global game company. And with that, I want to thank you for your support.
spk10: Great. Thank you, everyone, for joining us on our call. I'll turn it back over to the operator.
spk07: Yes, thank you. As mentioned, that does conclude today's teleconference. Thank you so much for attending today's presentation.
spk11: You may now disconnect.
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