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spk08: Hello and welcome to the International Game Technology Q3 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again press star 1. I'll now turn the conference over to James Hurley, Senior Vice President of Investor Relations. Please go ahead.
spk00: Thank you, and thank you all for joining us on IGT's Q3 2023 conference call, which is hosted by Vince Sadusky, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions. We are presenting from multiple locations today, so please bear with us if we encounter any technical difficulties. During today's call, we will be making some forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings. During this call, we will discuss certain non-GAAP financial measures. You'll find additional disclosures regarding these non-GAAP measures including reconciliations with comparable gap measures in our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our investor relations website. And now I'll turn the call over to Vince.
spk07: Thanks, Jim, and hello to everyone joining us. Well, we're reporting strong Q3 and year-to-date results today. Excellent momentum and key performance indicators across all segments drove year-to-date revenue up 8%. when adjusted for the sale of Italy commercial services. That includes 5% growth for our global lottery segment, a 12% increase for global gaming, and 17% expansion for Play Digital. Q3 was aligned with year-to-date trends with revenue of 6% net of Italy commercial services. That translated into good profit growth. Q3 operating income rose 13% or 20% net of commercial services and achieved a record operating margin for a third quarter period. Year-to-date operating income was up 8% or 13% net of Italy Commercial Services, and the operating margin expanded over 100 basis points to 23%. We delivered 200 basis points of EBITDA margin expansion to 42% in the first nine months, with each operating segment contributing to the improvement. This puts us firmly on track to achieve our full year 2023 revenue and margin goals. Moving on to segment-level performance, global lottery same-source sales were up 3% in the third quarter, in line with the 4% growth for the year-to-date period, and building on a strong multi-year growth trajectory. Italy performance in the first nine months continues to impress with 8% same-store sales growth, fueled by increases for both scratch and win and lotto games. A consistent flow of game innovation, complemented by our unique player insights and strategic portfolio optimization initiatives, have been the key drivers of Italy's growth this year. In the US and the rest of the world, same store sales are up over 3% on robust Powerball and MegaMillion sales in the US. During the quarter, IGT extended several longstanding business partnerships. California is the second largest lottery in the US and IGT's relationship there spans more than three decades. Over that time, our solutions empowered over 41 billion in support for California's public schools. A seven-year extension in California secures this important partnership through at least October of 2033. We also secured two 10-year contract extensions with the Kentucky Lottery Corporation, where IGT will remain the primary technology provider for both retail and iLottery solutions through 2036. It's another 30-plus-year partnership to fund higher education throughout Kentucky. Our current lottery contract portfolio has a revenue-weighted six years remaining with extension options. The California and Kentucky extensions speak to the confidence and trust the world's premier lotteries have in IGT's best-in-class modern lottery solutions. This includes our cloud-based systems platforms and Omnia, our new player-centric omnichannel solution. iLottery sales continue to expand at a brisk pace, rising over 50% in the first nine months, reflecting broad-based momentum around the world. We continue to deploy IGT's latest cloud-based iLottery platform and remote game server for customers in Lithuania, Paraguay, Poland, and Switzerland. In addition, we are installing new platforms in markets like Connecticut, where we'll launch iLottery later this year. Today, I'm joining you from the annual North American Association of State and Provincial Lotteries Conference in Milwaukee, where IGT is demonstrating its global lottery industry leadership. This includes the launch of the retailer Pro S2, a sequel to the most popular lottery terminal in the US. We'll also be showcasing the industry's first 48-bin self-service vending machine, as well as a digital menu board that is modern, sleek way for retailers to highlight instant ticket games and other promotional content at the point of sale. Lottery Link is another exciting innovation. It's the first and only solution to enable instant and draw game sales without a dedicated lottery terminal or software changes to the retailer point of sale. And it's a key enabler of our focus to expand in-lane lottery purchases at big box retailers nationwide. Let's move on to global gaming where compelling games and innovative new cabinets are driving strong results. Q3 revenue growth of 8% fueled an over 40% increase in operating income. The year-to-date performance is equally impressive with revenue of 12% and operating increasing operating income increasing 34% on a broad-based momentum across the business. Year-to-date global unit shipments are up 10%, complemented by a 7% increase in average selling prices. We've maintained the leading North American ship share for four and a half years, and we have some terrific new games and hardware that we believe can maintain our momentum. The new Diamond RS mechanical wheel stepper has been well-received, claiming about 40% share of North American mechanical real stepper shipments over the last year. We have another multi-level progressive success story with Magic Treasures, whose two-game theme secured top spots in a recent new core video game survey. Progress is equally good for our leased games, where the global install base grew for the fifth consecutive quarter. Prosperity Link continues to perform strongly with over 3,500 units deployed worldwide. We are building on that momentum with Mystery of the Lamp, introduced in June on our new peak curve 49 cabinet, which was recently recognized as the leading portrait upright cabinet in North America. We already have over 600 Mystery of the Lamp units in the field, generating productivity over two and a half times floor average. The two base games continue to be among the top new premium leased and WAP games in a recent Eilish survey. But we just came back from a strong showing at G2E where our product strategies were clear. For leased games, we intend to drive our success in MLPs and secure our fair share of that category with five new concepts, including two new Prosperity Link-based games. We expect to enhance our presence in the video web category with six new concepts, including the launch of Whitney Houston slots on the new Skyrise cabinet. And we intend to extend our Stanford leadership with the introduction of the Diamond RS Premium cabinet building on the success we've had with sales of the Diamond RS. On the for-sale side of the business, we plan to build on our leading North American chip share by making the Peak Curve 49 available for sale. We're doing this with a library of proven game families such as Magic Treasures, Samurai 888, and Kitty Glitter, supported by player-centric game features. Until now, the Peak Curve 49 was exclusive to Lease Games. Video poker and mechanical wheel steppers are areas where IGT has very strong market leadership positions. In many cases, our new video poker content is outperforming legacy content by over two times, and we've expanded the cabinet offer to maximize our global opportunity. The big bar top is one of the most impactful new video poker hardware introductions in the category, and crystal curve and cobalt cabinets offer new ways to grow our domestic and international video poker presence. As I mentioned earlier, the Diamond RS has revitalized our mechanical wheel offer and presents a compelling replacement opportunity for us. At G2E, we expanded our for-sale offer with the Diamond RS27, developed for high-limit rooms where IGT typically enjoys outsized shares. Profit expansion is the main story of Play Digital in the third quarter, with operating income up 32%. In the first nine months of the year, Play Digital revenue rose 17% and operating profit increased 46%. iGaming growth has been fueled by key content strategies and the incremental contribution from iSoftBed in the first half of the year. We expect to launch about 60 new games this year, more than double our historical pace. This expanded capacity, in addition to some unique capabilities, enables us to provide compelling value to our customers and players alike. One example is with the development of bespoke games such as Caesars Cleopatra for Caesars Palace Online Casino and Fort Knox Cleopatra for FanDuel. Another example is the launch of Wheel of Fortune Triple Gold Spin in New Jersey, the first ever omnichannel jackpot game in the U.S., leveraging the success of our popular PowerBucks game in Canada. We're looking to expand omnichannel games to new U.S. markets this year and launch Money Mania as a new omnichannel link in Canada this quarter. We are just starting to deploy our sophisticated user engagement tools that offer real time personalized player recommendations and promotions. We expect this unique leading edge technology to drive productivity through a richer player experience and build a strong and sustainable competitive advantage for our content. We continue to expand our sports betting customer base and now power nearly 100 casino sports books across North America. We recently introduced live streaming sports and sports betting functionality on the peak bar top and crystal flex terminals. Players can now watch a sporting event, bet on sports, and play video poker or slots all at the same terminal. Both generated a lot of interest at G2E. We had a great third quarter and it's been a productive first nine months of the year. Our results place us firmly on track to achieve our full year 2023 financial goals. We are doing this with a steadfast commitment to being a good corporate citizen, evidenced by momentum with key ESG initiatives. including the validation of our SBTI targets and improved ratings from several third-party agencies. As many of you know, we are evaluating strategic alternatives for the global gaming and play digital segments. That work is underway and progressing. At the same time, we have established a strong foundation for achieving our 2025 financial targets. The innovative new solutions featured at recent trade shows will be important catalysts in reaching our goals and in creating significant value for all stakeholders. Now I'll turn the call over to Max.
spk02: Thank you, Vince, and welcome to everyone joining us today. Once again, we're very pleased with the results on display today. We have been able to achieve or exceed our outlook as a result of a resilient performance in Global Lottery fueled by elevated play levels and a persistent jackpot performance. The continuation of the global gaming turnaround story with a further acceleration on its profitable growth trajectory and a play digital performance continuing to deliver substantial profit flow through. We generated more than a billion dollars in revenue in the third quarter consistent with the prior year, driven by strong key performance indicators across our three business segments. Revenue grew 6% excluding prior year contributions from the Italy Commercial Service business that was sold in September 2022. Q3 operating income rose 13% to $239 million, and adjusted EBITDA of $433 million was up 8%, led by double-digit increases in global gaming and play digital. These growth rates are even higher when you exclude $12 million in profit that was contributed by the commercial service business in the prior year. Profit margin expansion was also a notable achievement with operating income margin growth of 250 basis points to more than 22%, the highest level for a third quarter period in company history, and adjusted EBITDA margin up 270 basis points to 41%. As we mentioned last quarter, along with good organic performance driven by solid KPI improvement, we benefited from some operational process improvements in our product development that now require capitalization and amortization of certain costs that were historically expensed as incurred. The resulting impact was a financial benefit of about $10 million to operating income and approximately $20 million to adjusted EBITDA. The effective tax rate in the quarter was 35%, in line with our expectations that it would normalize in the second half of 2023. On a year-to-date basis, the effective tax rate adjusted for unusual or non-recurring items is in line with our full-year estimate in the mid-30s percent range. We deliver 46 cents in diluted earnings per share versus $1.30 in the prior year, as the prior year included some large non-operating items such as the gain on the sale of the commercial service business and the accrual of the DDI Benson Matters Settlement. Adjusted diluted earnings per share of $0.52 was up 21% from $0.43 in the prior year, primarily driven by the higher operating income performance. Now I would like to review the results of each business segment, beginning with global lottery. Third quarter revenue of about $600 million was down 4%, but up 5%, adjusting for the sale of Italy Commercial Service to underscore the underlying business performance more properly. Global same-store sales rose 3% driven by a nearly 5% increase in Italy with strong contributions from both instant ticket and draw games, and a nearly 3% increase in North America and the rest of the world, which benefited from elevated jackpot activity. Double-digit growth rates continue in iLottery, where same-store sales grew 24% in the quarter on broad-based strength across geographies and game types. Penetration in IGT served territories continued to expand at a rapid pace, reaching double digits in the U.S. and growing. Profitability was very strong with operating income of $206 million and OI margin of 34%, up 60 basis points compared to the prior year. At this point, we have been cruising well within the 25 2025 target range established at our 2021 investor day for at least the last seven quarters in a row. Adjusted EBITDA margin was 51% up 150 business points and maintaining a level in excess of 50% for the third consecutive quarter. In Q4, we expect to maintain low single digit same-store sales growth for instant ticket and draw games. Keep in mind, we have difficult North American rest of world jackpot comparisons, as the prior year included a $2 billion Powerball jackpot, which contributed about $20 million in revenue and profit. Instead, most of the benefit from this October Powerball jackpot was realized in Q3. Turning to gaming, we generated strong revenue and profit growth during the third quarter, with broad-based contributions across the product portfolio. Revenue of $409 million increased 8% over the prior year, propelled by growth in the installed bays and higher system and software sales. The global installed bays rose more than 470 units sequentially to over 52,600 units, with balanced growth across U.S., Canada, and the rest of the world, and yields continue to hold at nice levels. Global unit shipments exceeded 9,100 units led by a 23% increase in US and Canada casino replacement. Global ASPs were down slightly due to a higher mix of VLT and poker games as we continue to ramp up our efforts in delivering the new successful games and cabinets in the core video category. In fact, ASPs can vary quarter to quarter due to cadence of new product launches. And at this juncture, we expect Q4 ASPs to be more aligned with the levels we saw in the first half of the year. Higher system sales were primarily related to enhancements and upgrades to our advantage casino management system from existing customers. And software revenue grew on strong customer and player demand for IGT leading portfolio of poker products. Operating income of $93 million increased 42%, including about $10 million in benefit coming from the capitalization of R&D cost from the process improvement previously discussed. Operating income margin expanded 550 basis points to 23%, fueled by the easing of supply chain challenges, the higher margin system sales, and the said R&D process improvements. In Play Digital, iGaming GGR trends remained strong with double digit increases across geographies. iGaming revenue was up year over year, even in the absence of new jurisdictions coming online, driven by strong player demand for wide area progressive games. However, overall Play Digital revenue was flat year over year as iGaming growth was offset by the cessation of operations in certain legacy ISOFBAD jurisdictions, And sports betting was lower, primarily due to unusually high hold levels in the prior year, along with unusually low levels this quarter. Operating income rose 32% to $16 million on increased operating leverage and high soft bet acquisition costs in the prior year. Operating income margin expanded 660 basis points to 28%, progressing nicely toward the 2025 target of 30-plus percent. continue to deliver solid cash flows with year-to-date cash flow from operations totaling approximately 640 million which includes an after-tax impact of the final settlement of the ddi benson matter of about 185 million cash from operations was 825 million when you adjust for this item we expect robust cash flow generation to continue in the fourth quarter as strong profit contribution is accentuated by working capital benefits. We amended the definition of free cash flow last quarter to include deferred license payments, which represent capital invested in IP for game development and are a component of financing activities on the cash flow statement. Year-to-date capex and payments on deferred license fee total around $315 million, resulting in free cash flow of $324 million. Adjusted free cash flow, which excludes payment on legal settlement, is a better measure of the operational cash generated by these businesses and exceeded $500 million for the first nine months of the year. Net debt leverage has improved two, three times as we have been able to fully absorb the impact of the DDI Benson matter in just two quarters. Excluding that item, net debt leverage would have been slightly below 2.9 times, which is a new record. On a year-to-date basis, 120 million in capital has been returned to shareholders in the form of cash dividends. Late last week, we announced a make-whole call of the remaining 112 million euro of the 3.5% euro bond due in 2024. The repayment of this bond is scheduled to occur in November as we expect to build incremental free cash flow from our business operations during the quarter. Financial flexibility remains high, backed by total liquidity of $1.9 billion, comprised of about $600 million in unrestricted cash and additional borrowing capacity from undrawn credit facilities of approximately $1.3 billion. We're tightening our full-year outlook for revenue to about $4.3 billion at the top end of the previous range based on the strong year-to-date financial performance. The outlook for operating income margin remain at about 23% with cash from operations of $900 million to a billion and capex of $400 million to $450 million. The full year outlook, coupled with year-to-date results, implies a revenue target for the fourth quarter of around $1.1 billion. This assumes global lottery revenue growth grows low to mid single digits, including higher planned product sale revenue, with global gaming and play digital revenue in line with prior year. As a reminder, fourth quarter operating income is expected to include a total of about $25 million from restructuring costs in Italy and project costs related to the exploration of strategic alternatives for global gaming and play digital segments. Year-to-date, we have spent about $14 million on project costs. To summarize, we are pleased with the financial results we delivered in the third quarter, which included revenue growth, margin expansion, and strong cash flow generation. We're tightening our full-year revenue outlook to the top end of the previous range and maintaining a profit margin outlook, giving the strong year-to-date performance. We're well positioned for the future with net debt leverage already comfortably within our long-term target range, no meaningful near-term debt maturities, and access to significant liquidity. And now I would like to ask the operator to open the line for questions.
spk08: Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. One moment, please, for your first question. Your first question comes from the line of Barry Jonas of True Securities. Your line is open.
spk03: Hey, guys. Good morning. There have been some talk about potential competition for the Italian lotto contract when it comes up for renewal in a few years. Just curious if you can talk about your positioning there overall.
spk09: Thanks. Yeah, sure thing. It's I'll, I'll take it.
spk07: Um, you know, we've, we've, we've had, we've run the, the Italian lotto concession, um, for a very long period of time. You heard the results, I think as a result of the team of being absolutely outstanding. You know, we've taken a very old lottery and continued to innovate and drive incremental sales. This is a very mature marketplace with very sophisticated players. And I think, you know, the ability to innovate both on the retail side and on the game development side has generated, you know, great results for all the stakeholders, certainly the state, the tobacconists, or the IGT. Yeah, I think ultimately we'll see what the competition is. We feel very confident with our opportunity, our knowledge and ability to work very closely with the regulator as well in growing the games. And we really don't have more insight to offer up at this point, but we believe our leadership and our tenured position is clearly an advantage for us.
spk03: Got it, got it. That makes sense. And then just as a follow-up, you mentioned the strategic evaluation continues to progress. Just curious if you can give any more color there. I know folks are wondering if the financing environment is influencing the review at all. And then I'm also curious to get your thoughts on how the gaming and digital businesses are performing relative to your expectations when you actually started this process. It seems like they're doing quite well.
spk07: Thank you. Yeah, sure thing. Great question. I mean, we, you know, when we talk about this internally, we talk about, you know, the things you can control, the things you can't control. The most important thing for our business internally when entering into one of these processes is to ensure that we've done what we can do from a management perspective to keep our teams focused on the business of growing lottery and on growing gaming. And fortunately, that's gone very well. The market continues to be good from an industry perspective, but more importantly, I think the innovative products we brought to market continue to resonate as you're with us now for the third quarter for all of our divisions. Most particularly, the opportunity for distraction would certainly be greatest in gaming. And the team has done a great job. And we like to say, I mean, nothing keeps people focused on operations better than having success. And we've had really, really good success On the strategic process, you know, as we mentioned in the past, just taking you back to kind of the origination of the process, right? It was, you know, it was not done because of a dissatisfaction with any one of the businesses. In fact, you know, the company's been at these businesses of lottery and gaming for many, many years. And certainly, you know, over the last several years post-COVID, we've been really, really excited about the performance of the teams, the products, and the markets. So it was purely done from a perspective of being frustrated with the valuation we were receiving in the public marketplace and thought it was a good opportunity from a position of strength and momentum to take a look at potential other alternatives to increase shareholder value. So purely done from that perspective. As far as the market conditions go, we're clearly in a environment now, later in 2023, of the expectation of a higher interest rate environment for a longer period of time. But when you think about the market from an economic perspective, in the first half of this year, there were significant concerns around a recession and a decline in the overall economy in the back half of 2023, which fortunately for us and so many other businesses has not occurred. And the businesses we operate in remain very robust and high personal demand for entertainment services, which is great for our business and certainly for our customers' business. So we think you know, there's always a market for assets that are high quality. There's, you know, there's not a lot of, you know, high quality assets in the marketplace and the capital markets are open. So in thinking about, you know, kind of our strategic alternatives, you know, the alternative of a transaction for gaming, we believe is still valid and still potentially available. And we'll We'll go through the process, obviously. We feel very strongly about the value of these businesses. We'll go through the process and we'll make a determination ultimately as to what we think is the best alternative for our sole goal, which is to maximize shareholder value.
spk09: Great. That's really helpful. Thank you, Vince.
spk08: Your next question comes from the line of Chad Bannon of Macri. Your line is open.
spk04: Morning. Nice quarter. Vincent Max, wanted to start with the guide, I guess the Q4 guide coming in at the top end. It seems like the biggest component of that is the low single-digit growth for lottery that you're expecting on a same-store basis in Q4. That's kind of where that was in Q3, but just wanted to kind of focus a little bit more on that given the ever-moving consumer. Have you seen any changes in north america or in italian sales maybe throughout the third quarter and then if you're willing to kind of talk about you know some near-term trends into the fourth quarter has anything changed given that we're all keeping an eye on uh on that consumer thanks yeah specific to to lottery um
spk07: You know, we saw amazing growth in the first half of the year, both in North America and in Italy, our two largest markets by far. A lot of that was driven by instance, as well as a refreshing of the portfolio and the go-to-market strategy for Lotto in Italy. We got into the third quarter, we had some pretty tough comps given jackpots in North America were significant, several multi, more than a billion dollar jackpots last year. Fortunately, in the third quarter, we had the same phenomena take place. So we were able to drive incremental growth there. And in the fourth quarter, we had, you know, very significant jackpots again last year, multi-state jackpots. So we don't, you know, we're certainly not planning on that for this year. In the back half of the year, we've seen outside of the multi-state jackpots a moderation in the growth for both Scratch and Lotto. But again, we anticipated that normally new product launches, new price points are, if we've done a good job with the product, it drives incremental sales. And a lot of that took place in the first half of the year. And then in the back half of the year, there was, you know, a lot of consumption of multi-state jackpot purchases in the United States. So as far as, you know, what we're seeing, the trends in October, same-store sales for Italy, we're seeing up in the mid-single digits. You know, we think we'll probably end up somewhere in the neighborhood of low single-digit growth in the in the fourth quarter, which we think is in line with the longer-term outlook for Italy. And again, as we launch new products, we'll have certain quarters where we expect significant increases, and then those product play levels moderate. But I think on the U.S. side, again, the multi-state jackpot has driven a significant amount of sales for the third quarter in particular. We're not counting on that for the fourth quarter. And on the incident draw side, we think that'll be in line with the prior year, given we had significant product launches in larger states, especially in the area of scratch in 2022. So overall, we think the health of the business is very good. And I think the most important data point is our thesis that play levels would continue at these elevated levels that we experienced post-COVID. That continues to play out and be true.
spk02: And to complement what Vince was alluding to, we also have a slew of product sales expected to execute in Q4. in various countries as we deliver terminals both in North America and in Europe that will represent a significant increase to last year that will obviously round up the performance from a top-line perspective.
spk04: Thanks for that. And then on the global gaming margin goal that you kind of laid out at the investor day and you've talked about the last several quarters, It seems like that's kind of according to plan. In our recent meetings, you talked about, you know, half of that being supply chain and then half being just from scale. It looks like a lot of the supply chain and the scale kind of came in in this quarter. Max, can you just give us an update in terms of where you are, kind of what the upcoming opportunities are for further margin improvement to stay on the path for the 2025 margin goal? Thank you.
spk02: Yeah, sure. So obviously the 25 number is not in the bag as of yet, but we have a couple of good carryover impacts that will continue to progress along the way into next year as well. We anticipate the supply chain to continue to have a tailwind on our margins for 2024 as well as the situation has fully normalized and we expect now to be able to bring home those efficiency measures that we have put in place during the post-COVID years. Another area where we expect some tailwind is the improved mix of products in North America with the various launches of new cabinets, the PIC 49, and new games, we expect that the strength of our product offensive to really be a tailwind on our margin progression going forward. And then obviously we continue to enjoy the benefit from the increased scale. Those are the items that we control. Items that we have less of a control are more related to the geopolitical situations and the macroeconomic issues around the globe. And obviously we have to watch them carefully, but definitely those markets, the international markets in general are still running behind the pre-COVID period. And so as the market, the individual markets stabilize, we expect to be able to have improved progression in those individual markets as well. That would round up our performance on a margin journey trajectory.
spk09: Thank you very much. Appreciate it.
spk08: Your next question comes from the line of Jeff Stanchel of Stifel. Your line is open.
spk05: Hey, great. Thanks. Good morning, Vince, Max. Thanks for taking our questions. Starting off here, I wanted to follow up on one of Barry's questions earlier on the upcoming lot of renewal. Obviously, you're coming at it this time around from a position of financial strength just given where the balance sheet is but you know i guess my question is are there other reasons i guess you know besides financial that you might look to incorporate a minority partner again this time around yeah i would say uh the partnership the consortium that we put together last time has gone fine and i think it's benefited uh served the intended purpose and benefited
spk07: all parties to have a very strong offering. We obviously can't comment on the development of that for this next lotto tender. But as we've pointed out before, the company's certainly its capital structure is the best ever. It's got the lowest leverage level ever. So the company has a lot of flexibility to be able to think about and determine the best pathway forward. As I said, it's hard to really comment beyond that at this point.
spk05: Okay, great. That's helpful. Thanks, Vince. And then turning to the gaming business, replacement sales in North America were well ahead of kind of where we were thinking about things up more than 1,000 units quarter on quarter. I was just hoping you could sort of bucket out some of the sequential growth drivers here. What I mean by that specifically is how much of this sequential growth was driven by VLPs versus poker versus steppers, video, et cetera.
spk09: Just any color there to help kind of frame this out would be appreciated. Thanks. Yeah, I guess it's interesting.
spk07: From quarter to quarter, there is the demand for our machines changes. And it's really, I think, a positive for IGT that we are now in a position where we are very competitive and market leading, in fact, in several game categories. So I think one of the really cool things the team did at G2E, for example, was we were the only ones to set up a high limit room, right? And so all casinos aspire to have a high limit room as it's normally the highest yielding per capita by far and a big profit center. In fact, a lot of regional casinos don't have a high limit room because it just doesn't do all that well, but it's usually the premium casinos that have it. Anyway, we normally over index in the high limit room and we were able to utilize that high limit room concept at G2E. to visually show that you could outfit the entire room from mechanical stepper to video poker to core games to MLP games to WAP games with all of the latest new high performing titles by IGT. I think it was very effective visualization. So, you know, for example, in this quarter, Max had mentioned one of the reasons that our ASP was a little bit lower than we expected. was because we actually sold a lot of our new video poker cabinets into the marketplace. We mentioned our Diamond RS cabinet, for example. That cabinet we introduced several quarters ago, it took a little while to get some momentum for that cabinet. But once operators got a chance to see it, to understand it, to build in replacements for mechanical steppers, which don't happen all that often. They're long-lived machines that players really enjoy and oftentimes don't want to see replaced. You know, we ended up having very significant ship share. I think I'd mentioned we estimate somewhere around 40% of the replacement market for stepper cabinets were our Diamond RS, along with really good, you know, consistent deliveries of our MLP games and WAP games, et cetera. So it's... You know, rather than kind of comment specifically on the quarter, you know, that experience for the third quarter was different from the second quarter, where a lot of MLP games really kind of drove a lot of our production capacity and deliveries along with core games as well. So it definitely fluctuates from quarter to quarter. I think the takeaway is we're competitive in all these game categories. And when you add up all the numbers, you know, we had terrific yield. We had terrific ship share, and we had, you know, our fifth quarter in a row of increasing installed base. That was, you know, that was really significant and really, really nice. So that's the way we look at it. When we look at our overall KPIs, we're really pleased with the direction. And, you know, fourth quarter funnel looks, you know, looks good. We don't have a lot of visibility going way into the future, as you all know. That's the nature of the business. But fourth quarter looks like demand remains strong for us.
spk05: Great.
spk09: That's a really helpful caller. Thanks again, and congrats on a strong quarter.
spk08: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Era Macias of Jefferies. Your line is open.
spk06: I think it's David Katz. I think we may have just logged in that way. Good morning, everyone. Thanks for taking my question. I wanted to ask first about just lottery volatility and jackpot volatility. I recall a number of years ago that that's become more of a thing. Can you help us just understand the degree to which lotteries year-to-date have had some one-time volatility?
spk09: And then I have a quick follow-up. So, hi David, this is Max speaking.
spk02: So, and I guess in trying to interpolate your questions, volatility mostly have to do with jackpots in North America, I guess. Yes. Yes, so we have seen this steady interest in jackpot games for the better part of last year. That is likely attributable to the advertised jackpot that exceeded the $1 billion mark six times in the last 18 months. Obviously, advertised jackpot levels are held by the rising interest rate environment as the advertised jackpot levels are based on a 30-year annuity stream. That doesn't mean by default that the same level of underlying sales today to advertise a $1 billion jackpot is the same as it did a few years ago when interest rates were lower. So, for example, at comparable jackpot levels above $500 million, both Powerball and Mega Millions underlying sales have decreased over time. In 2022, both games would generate over $600 million in sales for a $1 billion plus jackpot. Sales are now less than $300 million for similar jackpots. Another way to understand this is with the lump sum payout. Today, the lump sum payout is less than half of the advertised jackpot and is down from over 60% in 2016 before the significant rise in interest rates. And so the last comment I'd like to make is obviously IGT is remunerated as a percentage of lottery ticket sales, not the advertised jackpot size. So despite the high volatility in the advertised jackpot, our remuneration is based on the lottery sales, the underlying lottery sales. That obviously goes up and down, but with a lower volatility than the advertised jackpot.
spk06: Very helpful. And if you could just give us a quick comment also on your outlook for slot sales. We obviously are having, you know, periodic debates and active debates about, you know, slot sales being a bit elevated in North America this year and, you know, what the outlook for next year, you know, could be like.
spk09: Please. Yeah.
spk07: Eilers had estimated this year slot sales overall North America to be up a couple of percentage points. I think they're currently estimating next year up a little bit less than that. You know, for us, we've certainly outpaced that as a result of good games and growing share. And I think that's really, really key for us. And I think one of the other keys is the increase in the in the install base. So having a greater number of machines out on a lease basis with yields holding up close to record levels, I think, is really a positive. The economy, obviously, everyone has their own estimates as to what's going to happen to the consumer going forward. But all we know is that slot GGR levels remain good. Customer sentiment remains good. you know, our challenges have really, what we've seen is really outside of the U.S. We continue to do a great job in Latin America. Our install bases increase significantly there. Demand is really good. But, you know, you've got some country concerns with the market like Argentina. EMEA is another marketplace where there's challenges. Western Europe, we've done really well. That market is you know, back to pre-COVID levels. But Eastern Europe continues to have significant issues. Geopolitical is probably the driver of that. But, you know, overall, that's, you know, kind of, I think, what the industry is saying and then what I think what we're seeing.
spk09: Thank you.
spk08: And your last question comes from the line of Joe Stoff of SIG. Your line is open.
spk01: Thank you. Good morning, Vince. Good morning, Max. I had two questions, if I could. One, you know, the gaming competitive landscape naturally is so fragmented. It may be tough for me, not others, to kind of put the puzzle together. And I was wondering, you know, Coming from G2E, it seems as though in terms of your competition, again, specifically within gaming, some of the small players are much softer. And I'm wondering if that's what you see in terms of the competitive landscape and whatever you can share with us versus obviously... you doing strong just based on results, and obviously maybe your two bigger competitors. So that's number one. And then number two, Max, you had mentioned on the supply chain that it had normalized, and I was wondering if you could just kind of remind us of first quarter, second quarter, just sort of the cadence of where the supply chain was in terms of being normal and or... tighter relative to our, you know, sort of expecting the benefit in those margins as we sort of adjust our models going forward.
spk07: Yeah, I'll answer the first question and let Max take the supply chain question. So, yeah, I think it's a great observation. I felt the same way. You know, I get to G2E a day early to meet with the teams and the setup, and you know, walk the floor quietly. And it's just remarkable the number of small players there are out there still. A lot of those companies are private. You don't know what their financials look like. Oftentimes they've got a niche that's made it a business, but not a significant business. And, you know, to be honest, being in this business for decades now, it's very hard to envision consistency of game performance over a long period of time when you don't have a large infrastructure and a very significant R&D investment on an ongoing basis as the larger companies such as ourselves have. That's not to say that they haven't had and that they won't have individual game successes from time to time. But when you think about the opportunity to exploit a great game concept internationally, that's a unique area for just a handful of us. A lot of the smaller players design games for specific markets. Let's say it's Latin America or Eastern Europe or North America and don't even have operations in other parts of the world. And they aspire to that, but they've been aspiring to that for a long period of time. So I do think it's it's hard to really generate any significant scale consistently without having this big, this large R&D investment. And I think, you know, something that probably similarly goes for the iCasino, the Play Digital business as well, there's a lot of competitors on that front because the barriers to entry are, of course, lower. However, I think we're seeing over time that the same phenomena is playing out, that if you're a significant operator in that space, you've got scale, you've got huge tech teams, game development teams, and your chances for success are greater. plus there's the customer interaction element of it as well, right? So, you know, as casinos consolidate under, you know, under holding companies, you know, it takes time to evaluate and listen to kind of one-off game developers, be it on the iCasino side or on the certainly on the land-based side. And then there's the approval process and all of that. So I just think that there's, you know, scale is really helpful and really matters, especially in an industry that requires a lot of R&D to be successful.
spk09: Thanks, Vince.
spk02: Very good. And Joe, in terms of the supply chain dynamics, just to keep it very simple, on the gaming side, the supply chain is easing Last year, in the second half of last year, we were running at about $20 million a quarter. We are less than half right now, but we're still having some supply chain costs in the system, baked into the system, and we have had them since Q1 of this year. So again, you see now the same benefit coming to fruition in Q3 and in Q4, is supposed to continue next year because of that easing process, getting to the final stage. And now companies are able to get back in the pre-COVID period where we were looking for opportunities to really find efficiencies in the supply chain organization. we expect that benefit to continue into 2024 as well. That's why we have called it a tailwind in our margin progression going forward.
spk01: I see.
spk02: That makes sense.
spk01: Is it fair to say that you would expect it maybe to say the level of spending that you're doing now, call it $10 million a quarter as you suggested, extra spending, that you know, maybe that ticks down during the course of 24?
spk02: Yeah, it may not be a regular tick down or constant tick down. It may be a little bit less early on in the year and more towards the second half of the year. But, yes, fundamentally that's what we expect to happen.
spk09: Great. Thanks, Max. Thanks, Vince. Thank you.
spk08: There are no further questions at this time. I will now turn the conference back to the CEO, Vince Dusky, for closing remarks.
spk07: Yeah, well, thank you all for joining us today. Our Q3 and our year-to-date revenue and profit results highlight the good momentum we have across each one of our business segments. It's a clear indication that our focus on driving growth, renovation, and optimizing our processes and scale is paying off. We're on a solid path to delivering on our full-year commitments and are on track with our 2025 targets. as we remain focused on unlocking the intrinsic value of IGT's market-leading businesses. We appreciate your interest in IGT, and we look forward to meeting with many of you in the coming weeks. And have a great day.
spk08: This concludes today's conference call. You may now disconnect.
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