LNW - NASDAQ

Welcome to the Light & Wonder 2022 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions]. Now let me turn the call over to Steve Wan, Director of Investor Relations for Light & Wonder. Mr. Wan, you may begin.

Thank you, operator, and good afternoon, everyone. During today's call, we will discuss our fourth quarter and full year 2022 results and operating performance, followed by a Q&A session. With me today are CEO, Matt Wilson and CFO, Connie James. Our call today will contain statements and they may 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 materials relating to this call posted on our website and our SEC filings. We will also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measures to the most directly comparable GAAP measure can be found in our earnings release as well as in the Investors section on our website. In 2022, we completed the sale of Lottery business to Brookfield Business Partners in the second quarter. And the sale of the Sports Betting business to Endeavor in the third quarter. Accordingly, we have reflected these businesses as discontinued operations in our consolidated statement of operations for all periods presented. We are reporting our results of continuing operations in 3 business segments: Gaming, SciPlay and iGaming. Amounts and disclosures referring to combined include both our continuing and discontinued operations. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website. With that, I'm pleased to turn the call over to Matt.

Thank you, Steve, and thanks to everyone for joining today's call. 2022 was a pivotal year for Light & Wonder. At our inaugural Investor Day last May, our team laid out a clear strategic plan and long-term targets to enhance shareholder value. We continue to deliver on that ambitious transformation plan whose speed and urgency by positioning ourselves to win when it comes to performance and the successful execution of our business operations. In fact, we delivered double-digit top and bottom-line growth year-over-year. Fourth quarter consolidated revenue increased 18% with significant growth across all line of businesses. For the full year, consolidated revenue grew 17%, which is even more impressive when you normalize for the $44 million VAT benefit in 2021. We transformed ourselves into a streamlined, integrated organization with a reconstituted balance sheet and a clear focus on our core mission of becoming the leading cross platform global games company. We now have a significant momentum in 2023, which sets us up to continued success towards our 1.4 billion targeted consolidated AEBITDA by 2025. Let's start with some highlights. Light & Wonder has seen continued strength in gross gaming revenue, further proof of the resilience of our industry and the simple fact that at the heart of our business, people love to play games. In this quarter, our games and platforms drove record success across all three of our business units. Gaming saw a record 10th consecutive quarter of North American premium installed base growth, in all a record 45% of our North American installed base is now premium, representing an enormously valuable profit center for us. SciPlay generated record revenue, record pay conversion and record ARPDAU, as our investments continue to drive engagement and monetization. And iGaming saw record GGR on our content aggregation platform, OGS, amid record performance by our original content. The scalability of that platform has led to record quarters for our new iGaming studio edition, Elk and Lightning Box, the latter of which experienced its fifth sequential quarter of growth under our management. Our fundamentals remain healthy, and we expect them to continue to drive results. In addition to continued GGR strength, we continue to see elevated revenue per day levels. Many of our operator partners have announced solid earnings. And we've also seen healthy player spend and engagement for our SciPlay games. All of these factors led us up to one key takeaway, we're executing successfully on the strategic vision underlying the long-range targets. Let's look at how we achieved that in Q4. As we discussed in Investor Day last May, the key growth drivers for gaming, aside from the ongoing market recovery, include our robust product roadmap and share gains in gaming operations, and game sales. In Q4, the cabinets and games we've already launched enabled us to deliver impressive results in our largest and most profitable segments. Meanwhile, revenue per day continues to remain well above 2019 levels, a clear reflection of the industry's resilience and the performance of our games. A great example of this is the great Ultimate Fire Link franchise, which continues to be a key catalyst for growth for our Mural installed base. In our Games sales segment, more than 5,000 units was shipped in North America, something we haven't done since 2019, and more than 7,700 units globally. In fact, we sold 31% more Kascada Dual Screen cabinets in its first year of launch compared to the Kascada Portrait, shattering the record of our historical best J43 cabinet and our Landmark 7000 remain the number one stepper cabinet in the January Eilers report. Coincidently, the Kascada Dual screen just won the Best Cabinet Award and Landmark 7000 walked away with the best Mechanical Real Game Award at the Fifth Annual EKG Slot Award show. All of this success is underpinned by chart topping games like Huff N' More Puff, Rich Little Piggies, Dancing Drums Prosperity and Blazing 777s, all of which are extensions of our evergreen franchises. Additionally, with further progress into the VLT market on a recent partnership with The Oregon Lottery, continuing our commitment of expanding into adjacencies. Turning to Australia, we continued to take share ending 2022 around 500 basis points higher than 2019 levels in the for-sale market. Our popular game, Dragons Unleashed, reached 2,000 games installed and Thunder Drums is now among the top four games in Queensland. I'm also pleased to share that we achieved number one share in New South Wales clubs in January, a first year at Light & Wonder, in a market where we've made significant progress in just over a year, a clear demonstration of our ability to take share in our priority markets. Our success in Q4 also extended to our systems business. Jon Wolfe has made an enormous impact in this space, both through his leadership and with the complementary technology bought-in from House Advantage. For example, we expanded our base of loyalty installed in the quarter and saw further momentum in cashless, doubling the number of machines featuring cashless enablement compared to last year. Meanwhile, in tables, we continued to have the leading products and IP in the space. We saw growth across our entire portfolio, and our revolutionary Shufflers products are providing critical data analytics promoting efficiency for operators. And with more subscribers to our VOLT program, we continue to add to our recurring revenue streams. So we entered 2023 with fantastic momentum, and notably with a full pipeline of products and games that will continue to fuel our growth. Studio X, led by our award-winning game designer, Ted Hase, who's delivered some of the biggest hits the industry has ever seen, will soon be launching two great game, Dragon Jinglong Jinbao and Monsters Frankenstein. We're also eagerly anticipating the launch of our new Cosmic cabinet in Q2, with proven franchises like Monopoly and Ultimate Fire Link Cash Falls hitting the floors. What's more, this will be the very first year in which we have a premium product in every key category and every key segment and unprecedented opportunity to further advance our vision as we launch more extensions of our evergreen franchises like Dancing Drums and Goldfish. Our recent systems win, solidified our leading position and improved our value proposition as we can now offer enhanced capabilities through seamless integration. Our enterprise systems offering are exceptional providing longevity and staff to go-to-market time and they're ready to be deployed for both new and existing customers. Looking forward in our tables business, we will continue to roll out enhancements on our hybrid ATG platform to increase tournament functionality, allowing operators to attract more players as we continue to provide leading table products that offer value to casinos. Our results in Q4 as well as throughout the year demonstrate that we are delivering on our commitments. We anticipate that operators will continue to invest in their floors, and then our leading talent and product portfolio will put us in a position to take additional share. That means even greater growth is on the horizon. Let's turn our attention to SciPlay. At Investor Day, we talked about our key growth drivers outpacing the social casino market, scaling ARPDAU and closing the gap with our peers and investing in both our SciPlay engine and their product roadmap. And in Q4, we executed successfully across all of these areas. In fact, according to Eilers, SciPlay was the standout performer among the top social casino operators in Q4 and was crowned number one social casino operator at the EKG Slot Awards just last week. SciPlay continued to increase market share and posted a record revenue quarter of 18% year-over-year to 182 million. Two of our largest game, Jackpot Party and Quick Hit Slots set revenue records of their own. For the year, we delivered record revenue of 671 million up 11%. These records validate the investments we've made to enhance SciPlay's core capabilities and product roadmap. Engagement also grew and we set records and monetization KPIs a landmark achievement and a major step towards scaling our ARPDAU. SciPlay continue to evolve it's data driven approach, propelling ad-tech capabilities significantly ahead of the industry, and made several notable advancements that boosted ad-tech by combining team learning with multiple data sources, predictive analytics and valuable in game advertising processes and strategies from our newly acquired Alictus. Additionally, SciPlay is testing its direct consumer platform, which will enhance player relationship management and increase its global reach, accelerating the potential to expand margins over the long-term and enhance player lifetime value. Entering 2023, we will be accelerating strategy to continue our industry leading social casino growth and take additional market share. We'll continue to invest in our best-in-class efficiency of ad-tech capabilities and improve returns on U.S. bet. Additionally, we'll make prudent expansion into new games via our core social casino product roadmap. In short, we got to keep doing what we know works, investing in our capabilities, and product roadmap to drive player engagement and loyalty while continuing to grow monetization, particularly at our core franchises, further differentiating our offerings from those of our peers. This is the power of our cross-platform strategy. For all the records we set in Q4, we're only just getting started. Let's turn to iGaming, where we are uniquely positioned to succeed as the industry continues to expand. Q4 underlined the value of our leadership position in the industry, as U.S. GGR experienced its ninth consecutive quarter of growth up 12% sequentially. We also saw significant growth in Canada, where GGR was up for the fifth consecutive quarter. And in both the EU and the U.K., we saw our third consecutive quarter of GGR growth with the EU up 17% and the U.K. up 27% over that period. We are the leader in this space because of our best-in-class content aggregation platform. And because of our unmatched first-party content. In Q4, we saw strong third-party launches including Terrific Tiger, the fourth in the Coin Combo series, looking at the top 20 games in the U.S. on our OGS, roughly 75% of those are proprietary content, underlining once again, the players love to play games across multiple platforms. In Q4, we also expanded our portfolio internationally with a regionalized approach, leading to launches such as Rainbow Riches, Power Pitch, and crops with cash, Stash and Grab Frenzy and Raging Rhino Mightyways. We are also pleased with our recent cross platform launch of one of our most recognized games, to [indiscernible], as our operator partners revealed that it's one of the best performing launches ever on their platform. And we continue to see strong performance across all three channels. These launches illustrate the power of our organic content development roadmap, and our cross-platform approach. Going forward, we're doubling down on this successful strategy and accelerating our cross-platform approach to content development. You can now expect two of our top performing land based titles being launched digitally each month and additional games coming from the studios we've acquired. Meanwhile, our live casino studio in Michigan received provisional licensing approval, and we're ready to bring our offering to market. This segment is a key driver to iGaming long-term growth, representing as much as 30% of the TAM and we're ready to compete and win with our full suite of table games offerings. Looking internationally, 2023 will be a year of continued strength through the regionalized roadmaps that have already brought us such success as well as further expansion into new markets. We know that the digitalization of gaming is only going to continue with new jurisdictions poised to come online in 2023 and beyond. Light & Wonder is strategically positioned to capitalize on those growth opportunities that come with it. When we reflect on the tremendous progress of the last year, it's easy to see why we're so excited about what's next. Gaming continues to execute on a product roadmap designed to capture share. SciPlay continues to outpace the market thanks to enhancement to its core capabilities, and a growing pipeline of great games. And iGaming continues its leadership position with original content in a rapidly expanding marketplace. We are entering 2023 with incredible momentum, thanks to our successful fourth quarter. And with a clear strategy in place to future growth. All the major pieces are in place, an unparalleled suite of assets and intellectual property, a cross platform strategic approach that is already bearing fruit with proven franchises, that performed well across gaming, SciPlay and iGaming, we expect eight key game themes to launch across all three platforms throughout 2023. Our revitalized R&D program, which is focused on developing and deploying the next generation of industry defining content, the investments we've made in this program, and the work we've done to integrate with focus and operations are fueling sustainable growth across our businesses. The industry's best talent, whose fingerprints are all over the games we will be launching this year. And most of all, a clear vision and strategic path that unifies and motivates our entire team like never before becoming the leading cross platform global games company. One more thing I'd like to add, we always say that great games are made by great people. At Light & Wonder we put a focus on culture because it's the key to attracting and retaining the very best people in the industry. Our focus on culture also fueled our efforts around environmental, social and corporate governance. We're now aligned to 12 of the 17 categories of the United Nations Sustainable Development Goals. And we're also partnered with 20 responsible gaming organizations and campaigns globally. Further, we will try to take home the DE&I award the year at the Women in Gaming Diversity Award, and Light & Wonder ranked among the top four gaming companies globally by the all end diversity DE&I Index. In closing, we kicked off 2023 with new energy and excitement within our organization. And with good reason. As the fantastic results from Q4 illustrate, we entered this year with significant strength, putting us on a clear path to delivering on our long-range targets that we laid out last May. I am so proud of what this team has achieved, and so grateful to every single employee that made the success possible. I think I speak for everyone when I say the best is yet to come. The future of Light & Wonder is brighter than ever. We ready to deliver on the promise of sustainable growth as we lead the industry forward. Thank you. Now let's turn things over to Connie.

Thank you, Matt. And good afternoon, everyone. Let me begin by saying how pleased I am with our results. We delivered exceptional fourth quarter and full year performance, a clear demonstration of the strength of our strategy and ability to execute on our roadmap. Fourth quarter consolidated revenue increased 18% to $682 million with double-digit growth across all three businesses. Operating income was $99 million and consolidated AEBITDA grew 23%, $265 million, driven by both higher revenue and significant margin improvement in SciPlay and iGaming. For the full year, consolidated revenue increased 17% to $2.5 billion. Operating income was $273 million and consolidated AEBITDA rose 15% to $913 million. Adjusted for the VAT benefit in 2021, consolidated revenue was up 19% and consolidated AEBITDA increased 22% year-over-year. This is a real testament to our continued focus to drive margin enhancement across the business. For the quarter consolidated AEBITDA margin from continuing operations was 39% versus 37% in the prior year period. We also saw significant sequential margin growth at SciPlay as record performance validated the investments, we've made in key growth initiatives. FX continued to have an impact on the comparative reported revenues, principally in iGaming, and to a lesser extent, the gaming business segment. On a consolidated basis FX impacts are immaterial to our results. Turning to the business units. We saw impressive performance across every area of our business. Beginning with gaming, we saw substantial progress, solidifying the foundation for long-term growth and share gains. We ended the year incredibly strong across all key metrics with higher revenue per day and average selling prices, resulting in healthy margins. Revenue in the quarter grew 18% year-over-year to $438 million and AEBITDA increased to $215 million, a 16% growth versus the prior period. This growth was driven by robust product sales in the quarter and double-digit growth in both systems and tables. AEBITDA margin in the quarter remained healthy at 49%. For the year, revenue grew by 21% and AEBITDA by 16% with significant gains across all business lines. We saw continued operational momentum in North American gaming operations as the premium installed base grew 8% year-over-year, exceeding 2019 levels. Global games sales continued to deliver solid growth in the quarter, with revenue up 11% sequentially and 41% year-over-year. This was driven by increased demand for our cabinets, which yielded higher average selling prices, an increase of 4% year-over-year. In Systems, we achieved a 26% quarterly revenue increase year-over-year on higher domestic cargo sales volumes and installs. And it's important to note our systems maintenance is a significant recurring revenue stream and is expected to be further enhanced with new loyalty functionalities being added to our existing capabilities. Lastly, in tables, we see the market continuing to recover with revenues up 11% year-over-year in the quarter, driven by growth in both bulk subscriptions and higher sales volumes. Overall, we anticipate solid demand and excellent performance extending into 2023 and beyond as we continue to expand our portfolio and meaningfully grow our gaming business. Turning to SciPlay. We delivered record fourth quarter and full year performance, once again, outpacing the social casino market and growing market share, clear evidence of the power of its enhanced core capabilities to generate results. The business achieved strong top-line growth, up 18% year-over-year in the quarter to $182 million and up 7% sequentially, led by 2 of our biggest games, Jackpot Party and Quick Hit Slots. For the year, we delivered record revenue of $671 million, up 11%. We grew fourth quarter AEBITDA 24% to $59 million and full year AEBITDA was $187 million, as SciPlay continues to invest in talent and core capabilities. And we're pleased to see the marketing and UA investments we've made starting to pay off. SciPlay's core business is demonstrating substantial progress with record key metrics across the board, including payer conversion hitting an all-time high of 10.4% in the quarter, average monthly revenue per paying user approaching $100 and record quarterly ARPDAU of $0.87, an 18% increase year-over-year. SciPlay had a record number of payers in 2022. We saw a 13% increase over the prior period. And now SciPlay has more payers than ever before in its history. This performance led the social casino market in 2022 where SciPlay grew market share. The financial results are a testament of SciPlay's successful execution of their strategy, and we expect to continue this momentum in 2023. Turning to iGaming, which has tremendous momentum. Revenue in the quarter grew 15% year-over-year to $62 million and AEBITDA increased 27% to $19 million. On a constant currency basis, revenue grew 22% in the quarter with steady growth, both in the U.S. and internationally. For the full year, revenue increased by 6%. On a constant currency basis, revenue grew 13% in the year, driven by market expansion that led to record GGR in the U.S., as well as solid performance from our original content launches. AEBITDA margin improved 300 basis points to 31% in the quarter versus the prior period, driven by revenue growth, resulting in an overall AEBITDA margin of 33% for the year. U.S. iGaming revenue increased by 41% in the fourth quarter year-over-year. Internationally, we had our third consecutive quarter of sequential rebound with elevated GGR across the U.K. and Europe on our open gaming platform. Year-over-year, the U.K. and Europe were up 27% and 12% respectively, driven by successful regionalized content launches. Looking forward, as we continue to expand our portfolio, we will take share through our content aggregation platform, leading [indiscernible] an upcoming live casino offering. Moving to capital management. A year ago, we outlined our balance and opportunistic capital allocation priorities in three categories: number one, to pay down debt and create a healthy balance sheet and put us in a 2.5x to 3.5x net debt leverage ratio range. Number two, to repurchase shares, and lastly, to continue making disciplined investments to drive sustainable and profitable growth. And in 2022, we delivered on every one of these commitments. First, we divested the lottery and sports betting businesses at peak valuation, totaling approximately $6.5 billion in gross proceeds and then immediately deployed a significant amount of those proceeds to reconstitute our balance sheet in the second quarter. Our net debt leverage ratio of 3.3x today puts us squarely within our targeted range, and we now have $1.8 billion of available liquidity and more than $900 million of cash on hand, significantly boosting our financial profile and flexibility. For the first time in many years, our balance sheet is a strategic advantage for us. Second, we authorized a 3-year $750 million share repurchase program in the first quarter of last year and immediately executed on our commitment to return capital to shareholders. We repurchased 7.2 million shares to-date, or $413 million, fulfilling 55% of our authorization in year one. Third, we aligned our investment priorities with our greatest growth opportunities to drive long-term value. We invested prudently and organically in our core capabilities, content and platforms, as well as in complementary businesses and adjacencies. I'm confident that these investments will fuel sustainable growth across the business for years to come. Turning to cash flow. Cash flow in the quarter was primarily impacted by approximately $176 million in tax payments related to the divestiture. In total, our year-to-date cash flow was affected by approximately $818 million in costs associated with our strategic review and divestitures, including tax payments. Looking ahead to 2023, continued operational efficiency remains a top priority as we further integrate our businesses. We are continually assessing opportunities to further optimize R&D spend by leveraging our world-class offshore development centers and deploying content across platforms. This enables us to scale more efficiently and maximize every dollar of R&D. In 2023, as expected, cash flow will be impacted by comps to drive incremental efficiencies as well as remaining tax payments of $33 million remained to the divestitures. Additionally, we will continue to evaluate the appropriate use of proceeds from the sale of our sports betting business. The obligations under our debt covenants require that we use the proceeds to either invest in the business or repay additional debt by the end of 2023. We look forward to sharing more about our determination of the best use of these proceeds in future quarters. Overall, we expect free cash flow to scale in the second half of the year. Moving to our capital allocation framework. In 2022, we made significant progress deleveraging and front-loading our 3-year share repurchase program, all with a lens to increase shareholder value. As we've done to-date, we will continue to maintain a balanced and opportunistic capital allocation framework. Importantly, we will continue to invest smartly leveraging our core capabilities in order to enhance long-term growth and bolster our leadership position. R&D and capital expenditures are key ways for us to achieve this. As we invest, we are committed to driving high ROI to enhance shareholder value. We will remain disciplined and scale investments only to the extent they exceed our return thresholds. After investing for growth and in the context of a healthy balance sheet, we will deploy excess capital in the most value-creating ways for our shareholders, including through our share repurchase program, additional debt reduction and disciplined accretive M&A. While our business is resilient, we recognize that markets are dynamic, and we are focused on maintaining a capital structure that is well positioned against potential economic uncertainty. We will continue to optimize our cash balances to preserve optionality in the near-term in order to maintain a flexible financial profile for sustainable growth and value creation. In closing, I'm truly proud of what the team has accomplished so far. With our reconstituted and healthy balance sheet, our enviable financial profile, our high margins and strong cash-generative businesses, coupled with our focus on operational excellence, Light & Wonder is poised to drive significant shareholder value. The fourth quarter was a proof point of our strong momentum and gives us confidence in achieving our $1.4 billion targeted consolidated AEBITDA by 2025. With that, we'll turn it over to the operator for your questions. Thank you.

Thank you. We have our first question comes from Barry Jonas from Truist. Barry, your line is now open.

Thank you so much. I wanted to start diving into the AEBITDA target, the $1.4 billion. Has anything changed in terms of the building blocks, the composition and maybe the cadence over the next three years to get there from here? I would just note that some of your competitors are guiding this year showing some conservatism around the macro. So curious to get your thoughts here.

Hi, Barry. Matt Wilson. So thanks for joining the call. I'll start off and then hand it to Connie. I think the path to 2025 results start with a great Q4, and that's what we're announcing here today. Growth across all key segments, gaming, iGaming and Social Casino had a fantastic quarter. So the good news is, we'll be back here in front of this audience in just over 60 days to talk about Q1. And I'll tell you that positive momentum really translating from Q4 into Q1. So we're feeling fantastic about the momentum in the business and we'll share more with you very shortly. And I think that really speaks to the health of the key markets that we operate in. So seeing a lot of optimism and buoyancy in those markets despite some of the macro headwinds that we're seeing. I think in the result in Q4 and '22 as well, you can see us demonstrating our ability to take share in priority markets. So I think you can see that in the Australian market, in gaming, we grew 500 basis points year-over-year. We were number one in the New South Wales market, which is a huge bellwether market for the Australian jurisdiction. I think you can see us taking share in Mechanical Reel. We won the best Mechanical Reel product at the Eilers Show last week. You can see us getting into adjacencies through the OSL announcement that you might have seen hit the wires recently. And I think there's more to come. We're launching 2 new cabinets that you would have seen at the G2E show, Cosmic and the flat cabinet, they're in presale at the moment and building great funnels. And then another kind of key highlight that underpins the momentum going forward is Studio X, Ted Hase, who is an award-winning game design. His first games are coming to market. They're both in presale at the moment, Dragon and Frankenstein. So we have all the pieces in place, and we've got great momentum exiting '22 into '23. But Connie, you might want to add to some of the building blocks at how do we get to those numbers.

Yes, I'm happy to do that. Thanks, Matt, and great to be with you, Barry, today. The building blocks are fundamentally the same as what we had outlined at Investor Day. And as Matt said, we have even more confidence in our ability to achieve that given the momentum we're seeing in the business. Fundamentally, we're going to grow every single one of our key businesses. The majority of the growth is going to continue to come from gaming, where we know there is a clear path to continue to drive global game sales with some of the adjacencies in the product that Matt had mentioned. And also in global gaming operations, more broadly in the premium segment, where we recorded 10 consecutive quarters of growth, which we're really excited about. In SciPlay, you would have seen, we had another ARPDAU record. We know that there's a clear path to continue to lift that over time, and that's exactly what we're focused on doing. And from a margin enhancement perspective, we're soft launching DTC at the moment, so that's another catalyst. In iGaming, we're going to continue to do what we've done to date, which is all about making great content, in particular, first-party content. And we're excited to launch Live Casino here very quickly, which I'm sure Matt will talk about here in the future. So all that to say, we've got great momentum in the business. It gives us a whole lot of confidence in our ability to achieve the $1.4 billion AEBITDA we outlined in 2025.

I think just speaking directly to kind of the macro conditions that you referenced. A lot of the operators reported last week, there's optimism in that set of results. Across our key markets, we're seeing kind of the dashboard lit up green in terms of the key KPIs. So the end markets that we operate in at the moment look really healthy. We're not delusional. You can speak to 10 different economists, and they'll give you 10 different versions of -- is there a recession coming and how deep might it be? And we've scenario planned for all 10 of those scenarios and many more, and we know the levers to pull should the macro conditions hit the sectors that we operate in. But at the moment, we're proving to be very resilient in terms of an industry.

Great. That's all incredibly helpful. I appreciate that. And just as a follow-up, some other land-based competitors including your former employer seem to be more focused now in iGaming. Just curious to get your thoughts how you see that impacting your positioning and strategy, if at all? Thank you.

Yes. Fair question. I think my personal view on this is unchanged, that competition is healthy for markets. It pushes everyone to be better, to do better, and it will push us to build better and better products. And I think it drives great outcomes for everyone, for players, for operators for the industry at large. We've got a range of competitors in the marketplace today, and we've got a healthy level of respect for all of them, and we think there'll be many more to come because they really see what we see, which is just an amazing opportunity for growth. We feel great about our market position. This team, under Dylan Slaney's leadership, has been at this for well over a decade. We made the acquisition of NYX, a number of years ago. And with that came talent, technology, and know-how, and that team has been doing this for a very long time, building industry-leading products in the category. So we love our position, couple that with the live casino opportunity that we're entering into now. We think we're positioned well for the opportunities set that's in front of us. And really, that's the heart of our cross-platform strategy that's unique to us. Build games, deploy them on slot machines and land-based casinos, take them into the iGaming universe, take them again into the Social Casino. So again, we respect the competition, but we like the way we're positioned.

Thanks so much, Matt. Thanks, Connie.

We have our next question comes from David Katz from Jefferies. David, your line is now open.

Hi, good morning or good evening, everyone. Connie, I wanted to go back to some of the discussion about capital allocation. And in particular, there's a lot to do. And I just wonder if debt reduction maybe has started to drift higher up the priorities after investing internally, in particular, how are you thinking about the order of those choices today versus a quarter or two quarters ago?

Great, and thanks, David. Good to be with you. Fundamentally, I'd say, if we just step back, I think it's important just to understand where we are today because last year was so transformative for us. If you think about what we've now achieved for the first time in a long time, we have a really healthy balance sheet, which puts us in a great position. In fact, we had net leverage recorded at 3.3x for the quarter, within our range of 2.5x to 3.5x. We also made significant progress on our share repurchase program. In fact, we front-loaded that executing about 55% in our first year. And importantly, we had the ability to continue to invest for growth. To your point, as we look forward, we're going to continue to take a real balanced and opportunistic approach to capital management, just as we've always done. We know that at the core of our growth is really organic investment, and we're going to continue to focus on that where we have excess capital, we'll look to deploy that, whether that is our share repurchase program, debt reduction or potential M&A, where we can see that it's accretive. That being said, I think it's just important to note also in the prepared remarks I mentioned that with the sports betting proceeds, we do have an obligation to either invest that in the business or pay down debt. We're continuing to look at the best use of those proceeds. We'll keep you posted on that. But fundamentally, our whole program is focused on ensuring we have the optionality, the balance sheet flexibility in order to drive shareholder growth

Thank you. And I wanted to just go back to iGaming and go a little bit deeper. Because we've started to see some states talk about legalizing, I guess, mainly mine, but do you need any legalization to occur in order to hit your targets for 2025?

Yes. We watch with the same level of enthusiasm your home state there. iGaming is a huge opportunity for us, like I just mentioned. It's hard to exactly predict when states will legalize, but we are seeing a lot of positive activity across a number of different states. And our view is the digitalization of gaming is inevitable. There's a confluence of just too many tailwinds for it not to happen, the success that we're seeing in the states that are already live are a testament to that. So really, our opportunity is to position ourselves to continue to take share in the markets that are live right now. So taking increased share of first-party content and then exploring this live casino opportunity that's in front of us.

And just the question specifically, David, we've taken a really prudent approach in how we think about the $1.4 billion target. We've had a couple of medium-sized states towards the end of '24 and '25. However, they're immaterial in the big scheme of things. As Matt said, we see clear growth from focusing on our content and importantly, live dealer.

Yes. This is a natural business for us to own. It's about content. We build content for the land-based business. We put that into iGaming. So our job is to position ourselves to maximize our share as these markets come online. So that's what we're investing for. Again, it's inevitable, hard to predict exactly when it's going to happen, but we believe in the coming years, the digitalization of gaming is going to happen in a big way.

Thank you. Me too.

Our next question comes from Ryan Sigdahl from Craig-Hallum. Ryan, your line is now open.

Hey, Matt, Connie. Good afternoon. One, sort of free cash flow, so the chart in the slide deck, I think it's helpful to really break down a lot of the onetime cash outflows you had this year. But a little bit of that sounds like it's going to carry into the first half of this year. But how do you think about kind of the back half of this year? Is it achievable to get to your 45% free cash flow conversion targets, kind of talk through second half this year and then I think into 2024.

Sure. And great to be with you, Ryan. First, let me start with we're excited that we operate in businesses, which naturally just have a high cash flow generation profile. You're right. We've seen this year a number of impacts associated with the divestitures on a full year basis, that was about $880 million, albeit put in the context of the $6.5 billion of gross proceeds. We're pleased with that outcome. As we look forward into 2023, there will still be a bit of noise in the number in the first half, primarily the tax payment we have in the second quarter of $33 million, beyond that, I think you'll start to see cash flow scale. As we get into '24 and '25, we're going to really have the benefit of revenue growth in addition to a number of the operational efficiency programs that we have in place starting to drop to the bottom-line, which will allow us to continue to scale margins. I mean we're still confident in kind of clicking into that plus 40% free cash flow range as we get into 2025.

And just for my follow-up, I want to switch over to SciPlay and I'll ask Josh, tomorrow, but I'd be curious for your guys' point of view, but they're significantly outperforming the industry. So kudos to everyone on that. But curious how important you think Light & Wonder's cross-platform strategy is contributing to that or if it's other kind of company-specific factors. Thanks.

Yes. I'm glad you asked the question. I think Josh and the team should take the victory lap on what is an outstanding quarter and kind of back-to-back outstanding quarters. There's a lot of ambition in that team, a lot of humility as well. So they're not done. They've got the work to do in front of them to continue to grow that business. If you look at the numbers, it was record across the board, revenue ARPDAU conversion, and I think there's a lot to be proud of. I think really this comes back to the investments that we made there about monetization and about making sure that we can close the gap on ARPDAU between us and some of our peers. And we still see a lot of headroom between where the SciPlay ARPDAU system and where some of the competitors are at. So more growth to come from that business. I think going to your question specifically about cross platform, this was the decision that we made through the strategic review, like the company that we wanted to be was an organization that had games and technology at the center of its universe. We divested lottery and sports, which look like parts of the portfolio that didn't ultimately fit with the rest of the businesses. But if you look at land base, the majority of what they do is building great flow content, putting it on cabinets, deploying that in land-based casino, taking that again into iGaming, sweating those assets, leveraging those franchises. And then if you look at the content that's driving a lot of the success in SciPlay, it's those evergreen franchises coming out of the land-based business. So these are now businesses that fit like hand in the glove, that they belong together. So I think it's the combination of the investments that we made in that business around monetization, but also the fact that we're able to take these incredible franchises from the land-based business and deploy them into Social Casino. Josh will give you a lot more about that. But yes, Josh, and that entire team at SciPlay have had a fantastic quarter and should be acknowledged, and thanks for that. So thank you.

Thanks, Matt, Connie. Congrats and good luck guys.

Our next question comes from Jeff Stantial from Stifel. Jeff, your line is now open.

Great. Good afternoon, Matt, Connie. Thanks for taking our questions. Starting off, Connie, I was hoping to get an update on where you stand from a supply chain and just a broader cost inflation standpoint, where are you seeing relief more recently, where are their pressure points still and the world looks today, how should we think about the timing for some of this to flow through to AEBITDA margins? Thanks.

Yes, absolutely. And great to be with you. First, I'd say that as an organization, we've navigated incredibly well over the last few years, and it's just a huge testament to the team. As we sit here today, things are much better than they've been in a really long time. It's interesting when we step back and look at this, there's perhaps a bit of a silver lining that we've seen. The disruptions that occurred over the last few years really forced us to think about how do we ensure that we optimize as an organization. And I'd say that it accelerated some of our plans from globalizing some of our product offerings to allow for commonality amongst parts. It deepened our reach into the supply chain, really partnering better with a few of our Tier 2 and Tier 3 suppliers. It forced us to think about value engineering and, importantly, also about how we leverage a geographical network to manage risk and, importantly, improve costs. All of that to say that we're excited actually about some of the operational efficiencies that we've now driven through the business, which we expect to benefit for years to come. All of that, I'd say we're in a great position today. We had an amazing Q4. We didn't have any hiccups from a supply chain perspective. And I think we're in a good place to continue to meet ongoing demand.

Yes. Kudos to Anthony Firmani who leads that effort for us. I'll tell you through COVID, there was some -- much around supply chain for the CEOs around the gaming industry, I think, by and large, those issues are behind us now. So the industry is in a much better footing in terms of supply chain. So well done to Anthony and the entire team. Q - Jeff Stantial Great. That's helpful. Thank you, both. And then for my follow-up, moving over to the Game Ops business. Obviously, a ton of heavy lifting here over the last couple of years. Can you just dig a bit deeper into how you're thinking about the roadmap here to 2023? And kind of specifically, how do you think about the timing for some of these retooling efforts to really start to flow through to installations and yields as 2023 progresses? Thanks.

Yes. This is a business that's very close to my heart. It's an organization or part of the organization. That was one of the key strategic tenants when we took over the business. Siobhan Lane is now running the gaming business and doing a fantastic job. And this is a part of the organization that continues to be a major focus. So we've put a lot of effort, energy and investment behind the Gaming Ops organization. We've just clicked off the tenth consecutive quarter of Gaming Ops installed base growth. This is a business that was in systemic decline prior to the pandemic. So nice to see that continuation of the momentum coming through. Comes back to launching the right hardware. And so we're just on the verge of launching the Cosmic cabinet. You might have seen that at the G2E show. We have a sales pipeline building. It's in presale at the moment. Two of Ted Hase's games will launch on that. So we've got the right talent. We've got the right hardware. We've got the right momentum and there's more investments coming to support that over time. I think you've also got Rich Schneider, who I think is a hall of fame, CPO, pulling a lot of the strengths to make sure that we've got the right investment in the right area. So good momentum in that business, and I think things like Cosmic and Ted Hase and his team, alongside all the studios that we'll have, will just help turbocharge that over time.

Maybe just building also off of what Matt said. We're excited to see, as he mentioned, the 10 consecutive quarters of premium gaming operations growth, and we do intend to continue to grow that business. Part of what you've seen right now is just a turbocharging of some of the investment, not only from an R&D perspective, but also as a CapEx perspective. We had a really aging installed base. I think we're finally starting to get to that point where you're going to start to see further growth as we kind of trued up that underlying position. And the games are getting better and better. And for the first time, we have a full really dynamic suite in terms of a portfolio to play in every key segment within gaming operations. So we're excited about the growth prospects ahead.

Great. That's helpful. Thank you, both. I will pass it on.

Our last question comes from Chad Beynon from Macquarie. Chad, your line is open.

Good evening, Matt, Connie. Nice execution. Thanks for taking my question. Matt, just wanted to start with one of the goals that you laid out at the Investor Day, you talked about game sales market share in North America and also in AN

Great question. Like I said, some signs of growth in key segments, but more to come. So I think this is really about making sure two things. We've got the right hardware launched in each of the key segments. And so I think Cosmic and the Dual Screen plan that we launched in the first half of this year will kind of really round out the portfolio and make sure we have the arsenal complete across all the major key segments. And then, it's really about optimizing this R&D program that Rich Schneider and the team are leading. We've managed to raise our levels of investment in R&D pretty dramatically over kind of 2019 levels, and we've done that while maintaining margins. So we've given Rich and the team all of the dollars that they need to go out there and to make sure that all the studios that we have are fully funded. We onboarded Studio X with Ted Hase. So it's been about putting the investment in place and just making sure we have all of the right tools in place to drive that level of product quality over time. And I think the infusion of Ted Hase's games is just adding to that. So again, Dragon and Frankenstein are in presale at the moment, more to come in the back half of the year. So yes, like I said, there's pockets of share growth across the business, but we're really laser-focused on making sure that we drive the share outcome that we've committed to. Connie, anything to add?

I'd just say that there were really two fundamental key pillars as we were looking at the share -- or should I say, the for-sale segment. The first one was we expected to see a market recovery into 2023. I think the back half of '22 and what we're seeing in the funnel today is a really positive sign that that's happening. And the second one, to Matt's point, is to ensure that we have product in all of the right categories, importantly, also with the number of adjacencies, which are coming online soon. So we feel good that those two key tenants of the commitment are in really good shape.

Yes. And I think that's what you saw in the Q4 numbers a pretty dramatic uptick in terms of the game sales number. Like I said, we're expanding into the Oregon State Lottery. We have just a handful of units out right now and that we see that as a big market opportunity for us. And then, we've got big ambitions in VLT and beyond. So I think it's the combination of the core replacement market and then these adjacencies that we're entering over time. So feeling convicted about the direction of travel there.

That's great to see. Thank you. And then my follow-up, I don't want to leave systems out of this call, 30% growth in the back half. You talked about House Advantage and in the business is almost back to 2019 levels. Wondering if this should be viewed as maybe some deferred CapEx from your operators that are spending here or if the growth the offering, kind of what you guys are doing on the cashless side could provide some pretty strong growth, maybe not at those levels, but that, that could continue in the near term? And that's all for me. Thank you.

Yes. Thanks, Chad. [Adjacent] [ph] to the portfolio. That's an area that we're pretty proud of. We made the acquisition of House Advantage. We brought in a leader like Jon Wolfe, who is exceptional, knows the operator's pain points, knows how to run technology teams. He's been spending a good amount of his time over in India, kind of working with our best-in-class systems development team. So feeling a lot of momentum there. We've been to two shows with him now. We went to G2E and then also to [indiscernible], and we're talking about kind of his vision to take systems to the next level. So it was a great close to Q4, and we see good momentum heading into Q1. So yes, it's a business that we felt like was a bit underinvested, needed some retooling, needed a new leader to take us forward, and that's what we've got with Jon, and he's really reinvigorated things, feeling really good about the system direction.

Thanks. Appreciate it.

We have no further questions on the line. I will now hand back to Matt Wilson, CEO of Light & Wonder. Matt?