LNW - NASDAQ

Welcome to the Light & Wonder 2024 First Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to Nick

Thank you, Operator, and welcome, everyone, to our first quarter 2024 earnings conference call. With me today are Matt Wilson, our President and CEO; and Oliver Chow, our CFO. During today's call, we will discuss our first quarter results and operating performance, followed by a question-and-answer session. Today's call will contain forward-looking statements that 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 filings with the SEC. We will also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings release located in the Investors section of our website. 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 will now turn the call over to Matt.

Thank you, Nick, and thanks to everyone for joining us today. Our first quarter performance marked a great start to 2024 for Light & Wonder, building on the momentum that we've created since we began our transformation journey and affirming our position as the leading cross-platform global games company. During the first quarter, our team did an outstanding job executing our strategy and meeting our financial and operating objectives. Oliver will provide more details in his financial comments, but we are extremely proud to deliver our 12th consecutive quarter of year-over-year growth and our sixth consecutive quarter of double-digit revenue growth across all lines of business. The gaming industry has proven to be resilient in today's macroeconomic environment, with healthy consumer demand fueling our impressive growth. These strong results confirm that we are investing in all the right places and in the right talent, providing innovative content and cutting-edge technology that enhances the player's experience and builds a loyal customer base. We will continue to execute diligently, with a focus on driving sustainable long-term growth. At Light & Wonder it's all about the games. Our aspirations go beyond just one brand or franchise. We are fortunate to have a robust and diversified road map [ boasting ] engaging and dynamic game content for players to enjoy across all of their favorite channels. With that, let's turn to our operational highlights for each business. In gaming, we continue to make significant progress on our journey. And given the quality of products, [ we see ] this year as an inflection point to start scaling our [ game fleet ] in a meaningful way. As many of you have heard, our Australian-born hit franchise, Dragon Train, has arrived in the U.S., and we expect it to contribute to gaming operations growth this year. In fact, Dragon Train debuted as the top new franchise, with 4 of its titles in the top 10 index in new premium leased games on the Eilers Report. Our commercial team is collaborating with our operator partners and being strategic with placements as we continue to optimize the floors for performance while preserving the longevity of our existing units. That said, our North American premium install base has grown for 15 consecutive quarters and now represents 49% of the North American install base. Just recently, we also launched our new large-screen jumbo cabinet, Horizon, with Dancing Drums Ultimate Explosion, and it's off to a strong start. Our execution on licensed titles is second to none, as Monsters - Frankenstein continues to perform well on the [ charts ], with more placements on the floor. We are prudent with license spend, with a disciplined focus on ROI, and this gives me the confidence that we will capitalize on the upcoming launches such as Squid Game in the near future. On to game sales. During the quarter, we shipped close to 9,700 units globally, with broad-based strength across the board, and achieved #1 ship share in Australia for the first time ever in the company's history. We see opportunities outside of the traditional North American and Australian replacement markets, as we further deliver units into international opportunities and adjacencies, such as shipments to Asia, specifically Macau, Philippines and South Korea, in the quarter. In the adjacent markets, we are progressing well with the Oregon and Canadian VLT shipments, with rolling sales into the Georgia coin-operated amusement machine market as well as various other video lottery, Class II, and historical horse racing markets. We will continue working towards gaining share in the North American market on the backs of our wide array of successful franchises, such as Blazing 777, Huff N' More Puffs, Big Hot Flaming Pots, Lion Link and Gold Fish. On to systems and tables. Our rebound strategy of enhanced collaboration driven by innovation is expected to provide sustainable momentum, further solidifying our leadership position, with a focus on increasing recurring revenue streams by expanding system software and maintenance services and table product subscriptions as we continue to be the innovative thought leader in the space. Overall, we have strong conviction in gaming's growth trajectory, as we continue to build on our hardware, brands and franchise extensions, with recent data showing our hit game, Huff N' Even More Puffs, indexing as the #1 overall new core game and Light & Wonder occupying 12 out of the top 25 games on the new premium leased and [indiscernible] progressive charts. We are well positioned to capture the opportunities ahead of us. Turning to SciPlay, where our steady outperformance continues, as we delivered another record revenue quarter, up 11% year-over-year, driven by continued growth in our largest 4 games: Jackpot Party, Quick Hit Slots, Gold Fish Casino and 88 Fortunes Slots. We continue to gain share in a stabilizing social casino market, as we have for the last 9 quarters, and are now at over an 11% market share. The investments we've made in our SciPlay engine and user acquisitions are bearing fruit, and the results are reflected in the strength of our portfolio of games. Meanwhile, average monthly revenue per paying user and average revenue per daily active user once again reached new heights as we continue to execute on our prudent and sustainable monetization strategy, one that has proven to work very well as we navigate seasonality in the business with favorable results. The marketing campaigns launched in the quarter solidify our convictions of investing in opportunities which are expected to generate attractive payback periods to fuel sustainable long-term engagement and monetization. SciPlay is the best in the industry in terms of user acquisition execution, which we've demonstrated consistently in our performance. In addition to executing to our marketing blueprint, some of our other growth initiatives include testing and scaling of new games and taking learnings to drive success for next-phase progression into [ Aztec ]. Most importantly, we've made meaningful progress on our direct-to-consumer platforms in the last 6 months, with approximately 6% of revenues generated from this channel in the first quarter. Our focus here is to proceed deliberately, ensuring a high-quality user experience to encourage player engagement. Overall, we see this as a great long-term opportunity as we continue to refine the platform and scale it across our games. With SciPlay's clear strategy and focus on road map execution, we are differentiating ourselves as one of the clear leaders in this space. On to iGaming, where the robust industry growth we saw in North America propelled us to another record revenue quarter. Our OGS platform delivered record gross gaming revenue volumes in the U.S. and Canada, as we saw year-over-year increases of 23% and 29%, respectively. This impressive growth was further accentuated with our content strategy and road map. In fact, we continue to see stellar performance from our third-party content, with Ultimate Fire Link Cash Falls reflecting solid performance, continuing the success we've seen with our proven land-based franchises. Elk Studios and Lightning Box continue to perform above expectations, a testament to our OGS platform providing valuable insights to their game data prior to Light & Wonder's acquisitions of these high-performing studios. Elk Studio's GGR is up 34% compared to prior year, driven by strong performance across Pirots 2 and Cygnus 4. Lightning Box had a record GGR quarter, with sequential growth of 12% supported by strong launches from the Thundering series. Playzido has also begun to scale, with 9 studios now live, connected to 72 operators across 10 markets as we continue to build on the accessibility and scalability of our iGaming network. Live casino continues to be an important part of our overall iGame portfolio as we continue to invest and optimize our offerings. We continue to see progress and believe that our collaboration with operator customers will ultimately solidify long-term partnerships as we scale and expand into other regions in the future. iGaming is one of the fastest-growing segments in the gaming space, as we continue to see within the U.S. market in the quarter. We will continue to expand our content portfolio and cross-launch our proven land-based and digital-native games, along with enhanced capabilities and new features added through our existing offerings, rounding out our robust iGaming portfolio to capitalize on legalization opportunities in the future. With our unmatched market position and cross-platform capabilities, Light & Wonder has created a compelling value proposition. Our results clearly demonstrate that we are delivering the iconic content that players want, with the ability to choose where and when they want to play their favorite Light & Wonder games. Across our business units, our industry-leading talent and high-performance culture are the key to our past success and provide confidence for our future. We will continue to enhance our talent and invest in our culture to drive innovation and promote the lasting impacts of our product offerings. Importantly, we will support our creative talent and strategic initiatives with disciplined R&D investments that drive long-term sustainable value. Above all, we have a focus on operational excellence as we continue to extend our market reach, and I want to thank the team for their dedication to this journey. I'm very excited about the momentum we are creating and look forward to the opportunities ahead for Light & Wonder in 2024. The best is yet to come. With that, I'll turn to Oliver to review our first quarter financial results.

Thank you, Matt. I'm pleased to share that we started the year with strong overall performance, marking our seventh consecutive quarter of double-digit consolidated revenue growth and sixth consecutive quarter of double-digit revenue growth across all 3 segments. Consolidated revenue increased 13% year-over-year to $756 million, driven by continued momentum across all businesses. Operating income was $165 million in the quarter, an increase of 62% over the prior year, primarily due to the higher revenue and healthy margins, along with lower depreciation and amortization and lower restructuring and other costs. Consolidated AEBITDA grew 13% to $281 million compared to the prior year period, resulting in a consolidated AEBITDA margin of 37% for the quarter on robust top line growth and our commitment to maintain strong margins across all of our businesses. Adjusted NPATA increased 22% year-over-year to $105 million, primarily due to strong revenue growth across all of our businesses and healthy margins. I will note that we disclosed a reconciliation of adjusted NPATA in our earnings press release, along with other financial details in our quarterly Form 10-Q filed with the SEC. Our results reflect a collective and collaborative work of our business units. In gaming, we continue to deliver on strong financial and key performance metrics, a true testament that we remain focused on executing our robust product road map and commercial strategy. Revenue in the quarter grew 14% year-over-year to $476 million, led by another quarter of strong global gaming machine sales and gains across gaming operations and systems. AEBITDA was up 13% to $232 million compared to the prior year, with profitability primarily driven by revenue uplift in the period. AEBITDA margin was 49%, in line with prior year levels, as we maintained healthy margins through our ongoing margin enhancement initiatives while continuing to invest for future growth. Gaming operations revenue in the quarter increased 3% compared to prior year on continued growth in our North American install base primarily due to the successful launch of Dragon Train in North America late in the quarter, partially offset by declines in international markets related to the fleet optimization that we previously shared. Importantly, revenue per day grew 4% in North America year-over-year, approaching $49, on continued performance of our licensed and proprietary games, backed by our popular COSMIC, Mural and Kascada Dual Screen cabinets. Global game sales were robust in the quarter, with revenue up 30% year-over-year. North American and international replacement unit shipments increased 14% and 68%, respectively, with North America driven by our ramp in adjacent markets and international driven by continued strength in Australia, new and expansion sales in the Philippines and South Korea as well as replacement opportunities in Macau. Additionally, average selling prices increased 6%, reaching approximately $20,000 in the quarter, as we continue to place premium products into both the North American and international markets. In systems, revenue increased 9% year-over-year, primarily on higher hardware sales into existing and new customers. And lastly, table products revenue was relatively flat compared to prior year. Our results demonstrated the strength of our product portfolio and continued execution to strategy, which gives me confidence in our ability to maintain the strong momentum through the year as we expand into international and adjacent markets in addition to further growth in the North American Class III market. Moving on to SciPlay, where we continue to outpace our peers with another record revenue quarter, once again establishing ourselves as the industry leader in year-over-year growth in the social casino space. Revenue in the quarter was up 11% year-over-year to $206 million on growth underpinned by robust player engagement and monetization, leveraging our dynamic Live Ops through the SciPlay engine across our portfolio of high-performing games. I would like to mention that you may have seen a notable increase in our web in-app purchases and other revenue line, with meaningful uplift in recent quarters. Revenue from our direct-to-consumer platform, which has progressed nicely, is reported in this line item. This subsequently impacts growth in the mobile line item that we and several other data platforms report externally. AEBITDA increased 15% to $62 million year-over-year, with AEBITDA margin of 100 basis points to 30%, driven by continued revenue growth, partially offset by higher targeted and planned marketing spend, which has proven to be an effective growth strategy for SciPlay. While there will be user acquisition costs that are dynamic quarter-to-quarter, we will always take a prudent approach with a focus on long-term return and expect that margin will scale over time. Our monetization metrics continue to set new records, with average revenue per daily active user up 13% year-over-year to just over $1, on a steady base of 2.2 million daily active users. Average monthly revenue per paying user was nearly $114, an increase of 17% compared to prior year, while maintaining payer conversion above 10%. We are pleased with the execution of SciPlay, where we continue to see outperformance relative to the market. These favorable growth trends continue to be driven by our focus on engagement, retention, monetization and our cross-platform strategy. We are confident in our marketing blueprint, where dollars go further on high-quality investment opportunities, generating meaningful returns to fuel sustainable long-term growth and profitability. On to iGaming, where our offering and ecosystem continues to scale as the market continues to expand. Revenue in the quarter increased 14% year-over-year to a record $74 million, primarily driven by our strong content launches and U.S. and international market expansion. AEBITDA grew 9% to $25 million, largely on top line growth, with AEBITDA margin remaining healthy at 34%, trending in line with historical levels while we continue to invest in content and product development with a focus on future margin expansion. Wagers processed through our iGaming OGS platform increased 10% from our prior year period to a record $22.4 billion on healthy levels of engagement. Overall, we expect to extend our momentum through our original content and regionalized road map, underpinned by scale and our well-rounded portfolio. With our businesses firing on all cylinders, we will continue to evaluate processes for efficiencies, being agile and nimble to adapt to changing environments to drive further operational excellence within the organization. This strategy has proven to be effective, as reflected in our healthy margins we achieved in the quarter as we continue to invest organically in the business. Importantly, our teams will continue to maximize the efficiency of our business through enhancing processes and automation opportunities, being committed to driving sustainable long-term profitability through value-enhancing initiatives. On to balance sheet and cash flow. At the end of the quarter, we had approximately $1.2 billion of available liquidity, including $450 million of cash on hand. Notably, we received a one-notch corporate family rating upgrade at Moody's in April on our strengthened balance sheet and meaningfully cash-generative business. Our consolidated operating cash flow was $171 million in the quarter, and free cash flow increased 26% compared to prior year to $93 million, reflective of a strong earnings, partially offset by less favorable changes in working capital and increases in capital expenditures. With the strong performance and demand of our newly released games, we expect an increase in capital expenditures in the coming quarters as we continue to invest for sustainable growth. The highly cash-generative nature of our business and continuous efforts to improve conversion rates will allow us to further scale annual cash flows over time. We remain within our targeted net debt leverage ratio range at 3.0x at the end of Q1, with enhanced optionality around capital allocation as our business continues to grow. During the quarter, we bought back $25 million worth of shares. In total, we have repurchased approximately $600 million, or 80% of the $750 million authorized program. As we generate incremental free cash flow, we will be opportunistic as we see value dislocations in the market, while having a programmatic share repurchase plan now in place. With a streamlined business, we will continue to invest organically into growth initiatives for the long term. We will consider M&A opportunities that are complementary to our core business and above internal return hurdles as we further develop and deploy our robust R&D engine across platforms. We remain diligent in our efforts to prioritize shareholder value through capital returns and strategic investments. Our team has done a tremendous job at executing to strategy, elevating Light & Wonder to one of the fastest-growing companies in the industry, underpinned by a healthy balance sheet and strong cash flows. Importantly, we are doing so in an efficient way, with a prudent approach to reinvesting back into the business without compromising top line growth and R&D, a key driver of success here at Light & Wonder. This quarter is just another proof point as we continue on our journey to scale the business. I am confident in our ability to deliver on our road map and achieve sustainable growth towards our target and beyond. With that, we will turn it over to the operator for your questions.

[Operator Instructions] The first question is from the line of Barry Jonas, with Truist.

I wanted to ask about SciPlay. How are you thinking about the growth trajectory for here? And for DTC, you're up 6% now. How do you see that ramping? And how high do you think it can get?

Great question. Matt Wilson here, obviously. Really proud of the exceptional results SciPlay has been able to orchestrate again. They just go quarter-to-quarter, back-to-back of consistently taking share in the marketplace, really the only provider in the space that's doing that. One of the things I really liked about this specific result was the diversification in the result. There was a contribution by all 4 of our big games; Jackpot Party, Quick Hit Slots, Gold Fish, 88 Fortunes, all making meaningful contributions to the growth of this business in this last quarter. And I think that just gives us the confidence that we can take that playbook and expand it even further across more games in our portfolio. I know the team is working really hard to retool MONOPOLY. That's another game that we see contributing to our results in the future. So it's very impressive. I think DTC is another great example of how this team tackles big hairy problems. We kind of used [ 2003 ] to pilot DTC. We were about 1% of revenues in 2023. In Q1 this year, like you mentioned, 6% of revenues coming through that platform. We see industry peers as high as 24%, 25%. So that's really the goalpost that we need to get to over time. It will take some time. We'll see it ramp up here in the second quarter and beyond. But yes, we see a long runway to having a successful DTC revenue stream down the line.

And just to build on that, we'll continue to invest and deploy the SciPlay engine across the portfolio of games, and we're going to continue to leverage data analytics to enhance player engagement and monetization prudently over time. There's also going to be further opportunities for us to lean into UA, as we did in Q1, with just a continued focus on improving returns. We saw strong returns on the ad spend that we did make in Q1. And so we'll further review that with the team and see if there's any other opportunities to drive LTVs over time.

Maybe just one final call-out for the SciPlay team. Obviously, headquartered out of Cedar Falls, Iowa. They've got a big team in Austin, Texas. They also have a huge team in Tel Aviv, in Israel. So to put up this level of results over the last few quarters, given everything that that team has dealt with, just couldn't be more proud from that team. It's just a testament to their character, their teamwork and the contribution they're making. So it's just fantastic to have them back in the portfolio. And really proud of the results and everything the SciPlay team has done.

The next question is from the line of Chad Beynon, with Macquarie.

Matt, Oliver, I wanted to drill down into unit sales. So a nice year-over-year growth. Matt, you've talked about some of these adjacencies over the past couple of meetings and earnings calls. Can you kind of flush that out just a little bit just in terms of where that opportunity stands with VLTs, COAM, et cetera, and kind of what's ahead in '24?

Great question. This is an exciting part of the gaming portfolio. I'm calling 2024 the Year of Adjacencies. We've been building towards this for a number of years. A lot of resources, a lot of R&D effort has gone into this. And a really important part of our growth strategy for the gaming business. There's a number of markets coming online in late '23 and then throughout '24. I think it's the continuation of the Illinois VGT market, which has been a great market for us for some time. That's continuing to expand there. So excited about that. We see [ OSL ] as a multi-quarter opportunity. We've shipped a couple of quarters' worth of games. There's more to come with [ OSL ]. There's a few Canadian VLT markets that we have signed up and we'll transact with throughout 2024. As you mentioned, Georgia COAM has come online. We've got further expansion in HHR in '24. We've got West Virginia VLTs. So it is really a layer cake of opportunities. I think we typically think about adjacencies in these large tranches of games and orders. But what we are actually seeing in our order book is these opportunities kind of layering on top of each other. I think if you look into the second quarter and third quarter, you'll start to see a really strong contribution coming out of these adjacencies, but coming through in a diversified way that really gives us a great pipeline. So I think it sets up nicely. I think Siobhan and Nathan Drane and the team have been working really hard to get us in this position, and 2024 will be a year where we get significant upside in those adjacent categories.

The next question is from the line of Rohan Gallagher, with Jarden.

Gaming operations, obviously, the most profitable segment within the gaming space. Probably a little bit frustrated with the lack of install growth up until the last 2 quarters. We're starting to see that move, with games like Dragon Train performing exceptionally well here in Australia. Can you unpack that in terms of your confidence in that inflection point towards realizing your targets for FY '24, '25, please?

Great question. I think the deck is stacked for gaming [ ops ] in 2024 for us. As you mentioned, we're seeing a solid pipeline of opportunity here. I think we've just clicked off the 15th consecutive quarter of install base growth. I think we're now reporting 49% of our install base in that premium category, and that's the one we care most about. That's the most profitable segment with the most opportunity. As you know, the North American install base is comprised of premium gaming offers and those public markets. It's really that premium category we're looking to drive. And I see that happening. So you can see that showing up in the RPDs. They're up 4% year-on-year in terms of RPDs. So that speaks to the premiumization of our install base. And I think we're very well positioned for the remainder of the year. I'll give you 2 data points that supports that. One, overnight, Eilers reported their quarterly slot survey. If you look at the most anticipated games on that list, #1 was Dragon Train, #2 was Squid Game, #5 was Huff N' Puff Money Match. And so 3 of the top 5 most anticipated games in terms of what operators are looking for. On one of the games, I think it was 52% of the total votes came from Light & Wonder products. So that just shows you the pipeline sets up really nicely for the remainder of the year. Another data point I'll give you, 12 of the top 25 new premium games on the recent Eilers survey were Light & Wonder games as well. So you can see the games that are performing in our install base are doing really well. And then the games in the pipeline, highly anticipated. So I think the contribution across a breadth of product, including Dragon Train, really sets us up for a great year in 2024, and I think you can expect a material pickup in installs throughout the remainder of the year.

And just to build on that, Matt, as we continue to scale our install base, especially on the premium side, we will expect CapEx to scale as that install base grows. So with the excitement that we're hearing from our customers around the product portfolio that Matt just mentioned, we'll continue to invest CapEx to meet the demands of the market, broadly speaking. So we're in a great position, and this is the inflection point we've been waiting for. So very exciting.

The next question is from the line of Ryan Sigdahl, with Craig-Hallum.

Matt, Oliver, I want to focus on international here a little bit. So continued strength in game sales outside of your core U.S. and Australian markets. It seems like your global platform is increasingly a powerful competitive advantage there. But curious, anything you can share, whether it be in South Korea, Macau, Philippines, et cetera, and what games and products are resonating for you guys?

Another great question. I think the international gaming category was a hero category for us. I think it's just one way where we are a significantly differentiated supplier in the space. Given our global footprint, our product diversity, our geographic diversity, we're not like many of the competitors in the space. We have a very diversified business. This category was up from a unit sales perspective 45% year-on-year, 45%. So just an amazing growth of that business. So hats off to Simon Johnson, who runs our international business. I think really 2-part story that's driving this number. The first one is the A&

The next question is from the line of Rohan Sundram, with MST Marquee.

Matt, Oliver and team, just the one for me in terms of how would you describe slot demand globally across the key markets from your customers? And how would you rate your forward order visibility in these key markets as well?

Thanks, Rohan. We're all looking forward to seeing you next week. I think from a macro perspective, and if you're just looking specifically at GGR in North America, I think we observed, like many did in the industry, a little bit of softness in January, weather related. And I think the remaining months of the quarter we saw a bounce-back in GGR. And the industry posted a really solid number. It's well up on pre-COVID levels. So I think that puts the industry on really solid footing. We're, from our vantage point, not seeing any changes in customer purchase behavior, and the order book looks really solid. And I think there's two things driving that order book for us. One is improving games. So again back to the Eilers report, we have the #1 game in the core space in Huff N' Even More Puff and a variety of games from a variety of studios really driving that improvement in product quality. So that kind of underpins the order book that we can see, looking forward. And then the other one is this adjacent story we just spoke about. These are discrete opportunities that are kind of well capitalized, both from a government perspective and from a new market perspective. So a lot less volatile in terms of the pipeline, I would say, around those adjacencies. So the combination of all those things gives us good confidence in the remainder of the year. I think the other international markets are in different places. I think you're seeing Asia rebound off the lows in the last few years and really coming back to full strength. I think Australia is a consistent churn market that we're participating in there. So I don't expect any radical changes there. But I think, on balance, the industry is on solid footing. We watch the consumer and the macro very closely, but nothing in the end markets at the moment suggesting that there's anything to worry about there.

And just a couple of very quick adds. Obviously, we do see solid data points from our [ coin end ] trending pretty well here in the quarter. And so to Matt's point, we see that. We see the GGR levels even in our digital businesses as well being pretty robust here in the quarter. So to Matt's point, I think we don't see anything in the data points here that would suggest anything different, but that's why it's important for us as we start to think about margin enhancement and other initiatives that we're working through to be able to give us some flexibility over the balance of the year.

The next question is from the line of David Katz, with Jefferies.

Can we just talk about 2 things? One is not a will-you or won't-you question, but we have this $1.4 billion number out for next year. Can we just go back over the sort of building blocks to getting to $1.4 billion and allow us to decide where those building blocks and how they stack up as we get into next year? And the second part of the question is really around cash flow conversion and, Oliver, how you see that evolving as we get toward that $1.4 billion-ish number for next year and, even longer term, where can the cash flow conversion slide up.

Can't have an earnings call without that question, David, the first, the $1.4 billion. Expected Barry to lead off with that. But yes, still very, very convicted. Obviously, we've been out telling the Street every earnings call $1.4 billion is the number. If you speak to people here at Light & Wonder, it is our mantra, it is our north star, it's the thing we're all chasing collectively. And we feel very confident we can get there. I think this last quarter is another demonstration of operating momentum that puts us squarely on the trajectory to get to that $1.4 billion. You won't see any hockey stick in '25. We see a nice kind of linear approach to getting to that '25 number. But a number of different pathways across all of these different businesses. I'll let Oliver speak to this. He's very well versed on the pathways.

On the pathways to the $1.4 billion? Yes. Listen, I think, to Matt's point, nothing has really changed in terms of the building blocks, too. So just very quickly, from a gaming perspective we've already talked about kind of the share gains that we have in the core kind of Class III markets. But the adjacent markets will be the critical component for us in gaming, and we're making really great strides here, to Matt's point earlier in the call. SciPlay, we continue to see strong retention engagement, and that's really driven by that SciPlay engine and the UA initiatives that we've consistently kind of put forth. And we've really consistently outpaced our peers in these segments. So prudent monetization will always be kind of the key for us in strategy, and DTC will also provide us some tailwinds here as we head into '25. And I think from an iGaming perspective, we expect continued growth in the global markets, particularly here in the U.S. As you've seen really over the past few years, our strategy remains pretty consistent there, which is just keep on deploying proven content, cross-platform content, and then really executing a very robust regionalized road map. So all of that, coupled with the margin enhancement initiatives and the operational excellence that we're focusing as an organization, will help propel us to the $1.4 billion.

And that's one call-out that I'd like to make, is this combination of the team focused on growth, but doing it efficiently. So building a big pipeline of margin enhancement opportunity. This team does a fantastic job of optimizing costs, and that just gives us some buffer in the top line if we need it, not that we see it, but then also potential incrementality if that doesn't materialize. So excited about the pathways, and it's clear and obvious to us.

And then David, to your free cash flow question, listen, that continues to be a key focus for us as a leadership team and as an organization. And we will see kind of conversion levels, especially here -- and free cash flow levels within the quarters kind of ebb and flow. There's some seasonality, obviously, related to timing of tax and interest payments, especially here in Q2, as well as timing of working capital and CapEx investments. But overall, we do expect our annual conversion rate to continue to trend favorably here over the coming years. We are not going to compromise long-term growth to achieve a specific conversion rate. But as we scale, we will continue to invest in CapEx, like I mentioned earlier, or R&D to really be key drivers for us as we move forward. But our free cash flow increased 26% this past quarter versus prior year, and that is really reflective of just the strong earnings and the highly cash-generative businesses that we have. And we'll continue to benefit from that over the coming years. So yes, we're confident in being able to scale that over time.

The next question is from the line of Jeff Stantial, with Stifel.

Matt, Oliver, just one strategic question from us. Matt, I'm curious to get your updated views on the M&A landscape really across all 3 of your segments. Are you seeing interesting acquisition opportunities out there? And if so, how have asking prices trended over the last year or so as we start to contemplate higher interest rates for longer?

Another great question and, obviously, one that comes into the frame when you get the balance sheet under control like we have. I would say 2 words characterize this management team and board over the last 2 years. It's really focused and disciplined. And I think that's really what this business transformation has all been underpinned by. I think if you look at things that we've done in the space over the last, say, 2.5 years, things like the acquisition of Elk and Lightning Box, the iGaming studios, that's squarely in line with our vision. I think another thing, if you look at the organic expansion of the R&D studios, I think bringing Kelsy Foster online and building a campus around her in Reno, that's another great example of what we're about and what we're interested in. Really looking at opportunities that are close to our core. We have a clear north star on who we are and, importantly, who we're not. I mean, Scientific Games was this wildly diverse portfolio of assets across lottery and sports and content and land-based and digital. We've chosen clearly a content strategy. We want to be the leading cross-platform global games company. And we'll look and evaluate every M&A target that supports that mission and vision, but we're not in a hurry to go and put a huge amount of complexity back into the portfolio. I think there's a number of people in the industry dealing with complexity as it relates to M&A. We've been through that with a lived experience for the team here. That comes with a level of chaos. So we've done a lot of work to clean up kind of the operating businesses and get this squarely focused at our vision. So we'll look at assets that help us project that further on, but not in a huge hurry to do a splashy piece of M&A.

The next question is from the line of Justin Barratt, with CLSA.

Matt, you just sort of touched on the balance sheet, but I was just wondering if you could expand. So look, your balance sheet should sort of continue to fill downwards as you generate that improved free cash flow and then also maintain a level of buybacks. But how should we think about, I guess, the potential for further buybacks beyond this sort of $750 million program? And then is there any chance that any form of dividend is reinstated near term?

I'll kick that off and then hand it to Oliver. I think the answer to that is yes to both of those things. I think the organization is on a growth trajectory. We want to continue that, look for ways to invest behind that both organically and inorganically to continue that growth profile in perpetuity. We know that's what investors are looking for. We also think when there's dislocations in the share price, then it's prudent for us as capital allocators to think about share buybacks. We intend to continue to execute through the remaining portion of the $750 million. We'll come back to the market and explain where do we go to from here, but buybacks at these levels still seem very opportunistic to us. But Oliver, anything to add?

I think, largely speaking, we're going to continue to execute to the blueprint from a capital allocation perspective. And there's really not a whole lot of, I would say, structural changes that we'll make at this point. In Q1, we're now back at the midpoint of our targeted net leverage range; so between 2.5x and 3.5x. And to Matt's point, share buyback will absolutely be a key focus for us as we now put a programmatic plan in place, and that's including the potential of tools such as 10b5-1s and just more systematic repurchases. Matt also mentioned organic investments. That is certainly areas of our highest returns that we see, and we absolutely see opportunities to continue to invest in talent and in the core business. But yes, I mean, from a dividends point of view, we constantly engage and evaluate with the board on really the best uses of capital and uses of our funds to enhance shareholder value. Currently, we have no plans to deviate from our capital allocation blueprint. But over the next several years, sure, dividends can be something that we consider at some point down the line.

The next question is from the line of Paul Mason, with Evans and Partners.

Just wanted to ask about cross-platform a bit. Your land-based business has got this great content that's been coming out: Dragon Train, Frankenstein. It looks like some hot games on the horizon as well. Could you maybe talk a bit about, like, the timing of when we might see some of these hit social casino or iGaming as well?

I think this is really our company at its best. Like I said earlier, we chose a strategy of being a content company and then having 3 businesses in the portfolio that all fed off that same idea of building great franchises and taking it across these 3 channels. Dragon Train is a fantastic example. It started in Australia. It was moved to premium gaming [ ops ] in the U.S. You'll see it in the social casino space in June, and you'll see it shortly after that in the iGaming space. So really trying to cut down the lag time between building the game the first time and then deploying it across these 3 channels. We have our CTO, Victor Blanco, who is working on a platform, a GDK platform, called Carbon, which will allow us to build a game one time and take that game very efficiently and effectively across all 3 channels. That's an investment that we're making. It's being worked on at the moment. It's not all the way to production. But when we get it there, we'll update the investment community. But yes, this is a key to our thesis, that we build great games, we take them across these franchises. We also have for the first time some games coming back the other way, so coming from the social casino space onto a land-based gaming floor, which is very exciting. And then also we have the data going all different ways across the ecosystem. So A/B testing games, rapid asset testing. So yes, we're really starting to maturate in the way we're leaning into those cross-platform opportunities. And you'll start to see a shorter and shorter lag time between a game being built in one channel and being deployed in another.

The next question is from the line of Allan Franklin, with Canaccord Genuity.

I just wanted to touch on the margin dynamics, please. Appreciate that there was some steady performance in that quarter for each of the business groups. And also just noting that first quarter can be seasonally low, just how to think about the margin progress over the course of the year, please?

Allan, great to hear from you. Yes, I was very pleased with the results here in Q1. We continue to post very healthy margins, benefiting from our continued focus on efficiencies, and the team continues to execute really well here. In gaming, our supply chain and cost initiatives have really helped maintain our strong margins. And going forward, as we further scale our gaming operations install base, we should continue to see margins scale with that over time. At SciPlay, there will be UA opportunities that will be available to us as we continue to take a prudent approach, as we have this quarter through the campaigns that you all may have seen. But we are laser-focused on long-term sustainable top and bottom line growth. And as we mentioned earlier, DTC will be a key factor for us in margin expansion within SciPlay. And then in terms of iGaming margins, we expect them to be fairly steady as we continue to expand on original content while we continue to invest in live casino. Over time, we do expect margins to expand in that business as we scale with more jurisdictions coming online. So we'll have a multitude of opportunities to expand margins over time. And we're staying laser-focused on our margin enhancement initiatives. A lean management rollout. We're now just starting to test robotic automation processes here in shared services and really starting to scale our offerings overall. So yes, we continue to see opportunities to grow margins while still investing back into the business.

There are no additional questions waiting at this time. I would now like to pass the conference over to Matt for concluding remarks.

Great. Thank you. About 2 years ago, we transformed from a constrained company as Scientific Games into Light & Wonder with a bold new vision and differentiated strategy. As we approach the 1-year anniversary of our secondary listing on the ASX, we are getting recognized as one of the fastest growing companies in our industry, backed by a world-class, people-first culture. To each and every one of you who happen to be a part of this journey, I want to thank you for your dedication as we continue to build upon the solid foundation we have here. I'm incredibly proud to be part of this process, and I look forward to further accomplishments with all of you along the way. Thank you again for joining us.