LNW - NASDAQ

Welcome to the Light & Wonder 2025 Second Quarter Earnings Conference Call. [Operator Instructions] I will now turn the call over to Nick

Thank you, operator, and welcome, everyone, to our second quarter 2025 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 second 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 and earnings presentation located in the Investors section of our website. With that, I will now turn the call over to Matt.

Hello, everyone, and thank you for joining us today. Our strong game performance and disciplined investments across our businesses enabled continued earnings growth for the quarter. Importantly, we delivered solid KPIs across key segments, driven by game content and thoughtful execution in a dynamic environment, which impacted the timing of game sales, underscoring the resilience of our business model, which continues to be driven by our R&D engine and expanding studio talent. As announced, we closed the Grover Charitable Gaming acquisition on May 16. We see continued positive momentum in the industry, particularly in U.S. states, which are expanding electronic pool tab programs. We're excited by the opportunity and are already seeing positive early contributions. In fact, we added over 600 active units since we announced the acquisition in February. This highlights the benefits of our diversified business model and execution discipline, and we look forward to key Light & Wonder game launches into the charitable gaming market in early 2026 with differentiated titles that will be incremental to the current fleet. We're pleased with the progress of integration as onboarding and operational alignment have been seamless to date. Our new office and studio in Raleigh, North Carolina, will serve as the main hub for our future growth and operations. We have also been working diligently on our expansion plans into Indiana, implementing the infrastructure in place to be ready from day 1 and we currently expect to deploy our first units in the state this fall. Additionally, today marks an important day for Light & Wonder as we are excited to announce the company's decision to transition to a sole ASX listing by the end of November 2025. Following an extensive diligence process undertaken with our advisers, including positive feedback from consultations with investors, both in Australia and the U.S., the decision was clear that this path will deliver tremendous shareholder value over the long term. We continue to engage with index providers and other stakeholders across both markets with the objective of ensuring that the transition is conducted as smoothly as possible, and we'll provide further details in the coming months. Further, as outlined at our recent Investor Day in May, we have exciting growth plans, which should provide an attractive investment proposition for both existing as well as potential new shareholders. Turning to our operational highlights in the quarter. In gaming, our Gaming Operations segment, exclusive of Grover's contribution, continues to deliver strong results, driven by the performance of our evergreen franchises and the success of our new content releases. Sequentially, we added 845 units to the North America installed base and over 2,700 units compared to the prior year. We have achieved 20 consecutive quarters of North American premium installed base growth with premium units holding at 52% of the North American fleet for the quarter, a true testament to the quality of our games underpinned by our unique R&D platform. Our proprietary titles, including Ultimate Fire Link and Huff N' Puff games, continue to both excel on existing and new lease game categories on the Eilers chart. In fact, Light & Wonder garnered 4 out of the top 5 indexing new premium and wide-area progressive games and led the market with over 44% of the total top new games in the category with Huff N' Even More Puff brand ranking #1. We are confident in our ability to further invest and nurture our homegrown franchises, which generate higher returns relative to licensed titles with a clear line of sight to creating new engaging themes and games. Game sales have been and will continue to be a key driver of our success. We've gained meaningful share and cemented our standing over the past 3 years in core North American and international markets as well as more recently across North American adjacencies. Global sales for the quarter saw a decline, particularly across the International segment, primarily as a result of a new cabinet release in Australia, coupled with the timing of sales into Asia being weighted to the fourth quarter compared to the prior year. For North America, unit sales were down moderately year-over-year, where we experienced some operator apprehension on slot purchases early in the quarter and saw a pushout of timing for some of our units sold into Canada. From a macroeconomic standpoint, as you are all aware, evolving tariff policies have contributed to a dynamic environment and land-based operators are navigating a more complex capital decision cycle than in normal circumstances. As we have seen improvement in the broader market, the tone from operators has also trended positively. We view these impacts as temporary in nature and not indicative of a long-term trend. Overall feedback from our operator partners affirms that Light & Wonder's games continue to deliver strong performance and value amongst the competitive supply landscape. We remain confident in our ability to execute with discipline and are well-positioned to deliver a stronger growth trajectory as we progress through the second half of the year. Moving on to systems and tables. We continue to execute our strategy to grow the recurring revenue streams of these businesses year-over-year. As the leading industry supplier of both businesses, we also have enviable sales revenue streams that vary quarter- to-quarter, dependent on the timing of operator hardware refreshes and new contracts. During our Investor Day in May, we outlined the strategy for each of the respective businesses, and I'm confident in the direction that we are headed. Recently, we've bolstered our Tables products segment with new leadership, and we expect to further build out our team soon to take advantage of the opportunities we are seeing in the space of Obsidian, our refreshed ETG offering, which has shown promise with solid early performance. I'm also pleased to announce the expansion of our production capabilities in Mexico to further service our customers globally. We expect this facility to run at full capacity to meet demands for our Cosmic, Cosmic Upright and Kascada Dual Screen cabinets in Canada and Mexico as part of our business optimization initiatives. Importantly, this enables us to fulfill the demand and timing shift of our Canadian units in the second half of the year. Our team has done an exceptional job executing on the blueprint we envisioned, and this is just one example of how we are staying nimble and adaptable to change. On to SciPlay, where we continue to trend above industry average with public market data estimating our market share at approximately 12%. In fact, we continue to see record revenues of Quick Hit Slots and 88 Fortunes in the quarter with double-digit growth compared to the prior year. Importantly, Jackpot Party continues to stabilize as we saw sequential growth in July. Our focus has now shifted to segmenting monetization towards higher ROI players. We expect to further invest in new way of campaigns as the new game economy reaches an optimized equilibrium. Additionally, we are growing content in the game portfolio in a sustainable manner. This includes titles like "Dancing Drums, which will leverage our SciAlgo strategy to acquire new players through ad monetized games at lower costs and cross-promote them into our higher-value game segment. We have confidence in our franchises as they pay dividends for us across various channels. Importantly, we're also seeing significant progress in engaging high-quality players with our direct-to-consumer platform, which grew materially, reaching 18% of revenue in the quarter. As we shared at Investor Day, we see a strong runway to continue to grow that platform as a percentage of revenue over the coming years, driving margin uplift for the business. Staying true to our core beliefs, we continue to evolve our games with new LiveOps and game economy strategies to drive continued outperformance of the market. While we have done so, we have seen a growing impact on the social casino market performance and the expansion of unregulated and untapped sweepstakes casino games. Our internal analysis shows a direct top-line impact from the growth of sweepstakes gaming in states that they are currently operating in. In states that have taken action to eliminate sweeps, we have seen a noteworthy uplift in our performance. As this issue is further addressed, we expect broader implementations of regulations to be a positive catalyst for growth in the social casino industry. SciPlay remains an integral part of our cross-platform strategy, and our teams continue to work diligently on data analytics and game development. Turning to iGaming. Our omnichannel strategy continues to drive success with Huff N' Even More Puff ranked as the #1 game on gross gaming revenue volume across our content aggregation OGS network in the quarter. In fact, our game performance and third-party network expansion enabled us to deliver record revenue and EBITDA, supported by strong momentum in North American markets. iGaming in the U.S. and Canada continues its strong growth trajectory with over 25% growth in GGR year-over-year. Importantly, our game performance reflects our ability to capitalize on that trend, where we saw 4 sequential quarters of GGR uplift on both first and third-party content on our RGS platform. Consistent with our strategy to prioritize high-return opportunities, we have sharpened our focus on proprietary content and form successful exclusive partnerships, both of which are central to our plan to expand distribution and drive improved margin economics across the business. Our ability to scale content is second to none as we boast the leading content aggregation platform with one of the largest studio operator networks within the industry. This is evidenced by our continued GGR records set at ELK and Lightning Box as our content continues to reach a wider audience, allowing franchises like Pirots and Thundering to Thrive with even more game extensions. We have a robust regionalized road map planned for the second half of the year to further extend our current market momentum in iGaming. We're also well-positioned to execute in nascent international markets and new potential ones such as the Philippines to further extend our iGaming presence globally. Our gaming, social and iGaming portfolio is strategically expanding its market footprint globally. We understand that content is at the center of our universe, and I want to reaffirm our focus at Light & Wonder, delivering great games, deepening our player engagement across platforms and executing on a robust content road map. We remain committed to investing and expanding our studios and are excited for new talent like Kelsy Foster and Nate MacGregor and their teams to debut new games in the North American and Australian markets, respectively. While we continue to focus on executing our plan for 2025, we are investing with an eye to the future as we laid out at our Investor Day. I'm incredibly proud of our teams around the world for their commitment and dedication in shaping Light Wonder into the company it is today and will be in the future. I'll now turn it to Oliver for a look at the financial performance for the quarter.

Thanks, Matt. This quarter demonstrated our resilience through earnings growth, driven by the team's disciplined execution on our core business and operational efficiency. We positioned the organization and its operation for long-term success as we continue to deliver on the milestones we set for ourselves. Revenue for the quarter was $809 million, inclusive of a partial quarter's contribution from Grover and record revenue at iGaming, offset by modest declines at Gaming and SciPlay. Net income increased 16% to $95 million, driven by lower cost of revenue and operating expenses as well as lower restructuring and other costs. The comparable prior year quarter included a $32 million charge related to certain legal matters with the current quarter, reflecting higher acquisition and related costs associated with the Grover acquisition, partially offset by higher depreciation and amortization. On a diluted per share basis, this was $1.11 for the quarter, an increase of 23% from the prior year period. Consolidated AEBITDA for the quarter was $352 million, an increase of 7% against the second quarter of 2024. Our margin optimization programs continue to progress as planned with consolidated AEBITDA margin reaching 44% for the quarter, a 400 basis point increase compared to the prior year period, supported by margin expansions across all businesses, revenue growth from iGaming and contributions by Grover. Adjusted NPATA for the quarter was $135 million, up 4% year-over-year, primarily benefiting from the contributions from Grover and expanded margins. Adjusted NPATA per share increased 11% to $1.58 compared to $1.42 in the prior year period. Operating cash flow was $106 million in the quarter, primarily impacted by $73 million related to the previously announced legal settlement payment pertaining to our legacy tables business. Absent this settlement, free cash flow saw a considerable year-over-year increase to over $100 million, driven primarily by earnings growth, working capital and capital spend efficiency. We remain committed to improving our quality of earnings through enhancing our recurring revenue business in addition to driving further efficiency in our inventory position, CapEx and working capital cycles to capture greater cash conversion over time. Turning to our business unit's financial highlights. Gaming revenue was $528 million in the quarter, with partial contributions of $21 million from Grover Charitable Gaming, which is now reported under the gaming operations line of business. AEBITDA was $280 million, an increase of 3% with a margin of 53%, an improvement of 300 basis points against the prior year, both primarily driven by the addition of Grover and the growth of our North American installed base. We expect further investments into the charitable gaming business going forward as we expand our studio and facilities, along with our planned entry into Indiana. Gaming operations revenue was $209 million for the quarter. Excluding Grover, we delivered a strong year-over-year revenue growth of 7%, driven by the aforementioned unit increases in North America. Revenue per day, excluding Grover, grew year-over-year, returning back to normalized growth as we previously discussed. Looking forward, we expect our momentum to continue in North America on the strong performance of our games and proliferation of Light & Wonder content into the charitable gaming business. Global game sales in the quarter were $191 million, primarily due to macroeconomic uncertainty impacting the timing of game sales as well as year-over-year comps in the international business on the timing of the hardware refresh cycle in Australia and 500 units of our Entain order in the prior year. I would also like to note that the Entain shipments of approximately 3,500 units in the prior year will affect international game sales comparability in the third quarter this year, and we expect Asia sales to be weighted to the fourth quarter. During the quarter, we shipped over 9,000 units globally, indicating that our share growth in key markets have established new baselines with solid demand of our products. This pipeline will be supported by the exciting lineup that we will be showcasing next week at the Australasian Gaming Expo, along with additional game extensions from our Evergreen franchises. Systems revenue was $73 million in the quarter, where the decline was driven by certain new placements and elevated hardware replacement sales in the prior year. Our system software revenue continues to grow year-over-year, contributing to our recurring revenue increase in the business. Table products revenue was $55 million and slightly higher compared to the prior year period on higher sales in EMEA and AN

[Operator Instructions] The first question comes from Rohan Gallagher with Jarden.

Just in relation to the new information and your decision to pursue a sole ASX listing, can you walk us through the investor engagement process, the timing decision, conscious of obviously material litigation afoot at the moment and the mechanisms in place to manage any volatile trading, please?

Ron, thanks for the question. Yes, exciting day for us. So this comes off the back of an extensive consultation process. We announced this back in February at the Q4 earnings call. We spent the subsequent 6 months engaging with investors and have finalized the decision here with the Board to transition to a sole ASX listing by the end of November 2025. As I said, the decision follows extensive diligence and investor engagement across Australia and the U.S., and we've received nothing but strong feedback from our major investors as evidenced by many of them transmitting stock to the ASX to support the initiative. We think transitioning to a sole ASX listing will help consolidate liquidity into a deep and liquid market that has a comprehensive and deep understanding of the gaming sector, and we expect it to unlock maximum shareholder value and align with our growth plans that we outlined back in May at our Investor Day. From a timing and transition perspective, we're targeting the ASX-only listing by the end of November 2025, with completion expected in advance of the December S&P rebalance. We've been actively engaged with not just shareholders, but also index providers and other stakeholders to make sure this process goes as seamlessly as possible. As we transition to a sole listing on the ASX, our market cap will go from circa AUD 4.5 billion to AUD 12.2 billion, and it will take us from circa #90 in the ASX 100 into the ASX 50 and, importantly, into the index. And we think that's an exciting initiative for us. It will optimize shareholder value, and we'll finalize the timelines and dates over the coming weeks and months. So yes, exciting, comes off the back of extensive consultation with shareholders, and we feel like now is the right time to get on and execute against that. Importantly, from a capital management perspective, we've increased our share buyback program from the authorized $1 billion by the Board to $1.5 billion. So we've spent to date $550 million of that authorized share buyback, which leaves us remaining $950 million, which represents about 12% of our current market cap. And we, as a management team and Board, have really demonstrated over the years to really be great stewards of shareholder capital and to effect that buyback when we see opportunities in the market, and we anticipate to do the same today. We expect to utilize at least 50% of that $950 million available capacity on buyback prior to the NASDAQ delisting. And if we exhaust the full $950 million before the end of 2025, it will take us briefly and temporarily out of our target leverage range of 2.5 to 3.5x. But we've shown the business is highly cash generative and has the ability to get back into that range very, very quickly. And so that's what we intend to do. So yes, with all those inputs from shareholders and other stakeholders, we felt like now is the time to move forward and execute. The Board and myself have approved this sole listing, and we're excited about it. We think it's a bright future for the organization.

And just it'd be remiss me just not to ask, obviously, the timing. Could you -- obviously, there's a process. Could you just give us any updates on the litigation at the moment?

Yes, not a huge amount of updates in terms of litigation. Both the Nevada and the Australian federal court cases are expected to head to trial in the first half of 2026. We had some very favorable rulings in June this year where the courts granted our motion to compel Aristocrat to specifically identify their trade secrets with more detail. So we won that motion. Also Aristocrat's motion that compelled us to provide all of our hold and spin math models to Aristocrat was denied. So both of those things are moving in our favor. We think that really kind of narrows the circumference of the case to the 2 games that are in question, Dragon Train and Jewel or Dragon and really wraps a bit of a bow around what we know the universe of potential for this case is. And then we just move forward and get this thing closed out and get in the rearview mirror. That's the update we have to share with you.

The next question comes from Barry Jonas with Truist.

Just wanted to ask about the new guidance range. Can you maybe walk through the difference between the high and the low end? And any more color you can give on general visibility that goes into your expected cadence? And then I guess just additionally, just confirm that nothing has changed to your recently issued '28 targets.

Yes. Barry, the way that we think about the business now is on a combined basis, inclusive of Grover. Obviously, we closed that transaction very recently. You can see Grover, business is performing exceptionally well, performing ahead of our expectations. It will deliver about $65 million in EBITDA for the full year, which will be a great contribution. And so now we've upgraded the range to include Grover. So the new guide is from $1.43 billion to $1.47 billion. From a base business perspective, we're still targeting $1.4 billion. You can see that's in the range, that plus the $65 million from Grover. But we wanted to provide a bit of a broader range just to give investors some visibility to some of the potential externalities that are at play, some of the risks that we're managing through from tariffs and the broader macro and also some investments we're planning to make in the second half that really do put us on a path towards that 2028 guide. For us now, it's about closing out the year, but then also importantly, making the right investments that set us on a course to deliver the next commitment that we've made to the investment community, which is that $2 billion by 2028. Some of those investments are things like standup costs to get into Indiana for Grover. That's an exciting opportunity that we're going to front-run some costs that will deliver fantastic results over the coming years as we access that market, scaling studios in Australia and here in the U.S. We're also setting up the headquarters in North Carolina. So these are no regrets investments that we want to make. And so we thought we'd broaden the range just to give investors some context around the range of possibilities. But make no mistake, the $1.4 billion for the base business is what the team is chasing, and we're driving hard towards delivering on that commitment.

Yes. Just to build on that, just based on the commentary that we provided earlier on our 3Q AEBITDA growth rate being low double digits, we do acknowledge the fact that 4Q AEBITDA rate growth rate is sizable. And so ultimately, we do have, to Matt's point, line of sight to the top end of the range with a more favorable comp setup from last year's fourth quarter. But as Matt said, there's always some puts and takes related to kind of product sales, and we just wanted to give as transparent of a view as we possibly could to you all as investors. So we'll continue to kind of work through kind of our base business. It remains very healthy, just underpinned by our content and just really just working through execution as we move forward. So we're confident in our trajectory. We look forward to executing on the long term.

Yes. And if we just zoom out for a second. When we put that guide out back in 2022, the business was generating $913 million in EBITDA. We just put out a range here of $1.43 billion to $1.47 billion. Business is set up with great momentum, great operating capacity, incredible R&D engine. We're in a great position to get on and execute against the next guide that we've laid out. So team should be proud of what they've generated so far.

Your next question comes from Matt Ryan with Barrenjoey.

Just wanted to hone in on the additional 600 units that you talked about with Grover. And maybe if you could just share some color on if that's reflective of, I guess, natural growth in the business that you're seeing at the moment or anything one-off? And I guess just as part of that, just any update on how integrated you feel you're getting within their business? Or are you just sort of taking things a bit slower? Just sort of curious on how fast things are going with that acquisition.

Yes. Thanks, Matt. I'd say integration is off to a fantastic start. The business is performing really well, delivering on its financial commitments. The thing that I've been uniquely surprised with is the cultural alignment. The team is fantastic. Brian Brown is doing a great job leading that business. Jimmy Forest, the Head of Sales, running that sales organization, just 2 fantastic leaders that we have the benefit of working with on a day-in, day-out basis. The 600 net adds is really nice growth in the existing markets, and it's just organic growth that we see with the tailwinds that we see across the pool tab segments in the markets that we operate in today. And we see that continuing into the coming quarters and years. And then importantly, the team is doing a lot of work to get ready for the Indiana market entry. So we think that happens in the fall. You'll see games installed later this year, another great growth pathway for us, wasn't in our base case, wasn't really fully contemplated as we did the acquisition. It's just one of these nice things that we picked up through that acquisition process. So yes, I'd say I'm really happy with the Grover team, how they're operating. They're operating and delivering ahead of the expectations that we laid out. And then I think more exciting for me as a games person been around games in my whole career is we have the first L&W content operating on the Grover platform already. So it's on an L&W cabinet. It's a known brand. We'll take a number of games to the G2E show, and we'll show the real underlying power of the Grover acquisition, that combination of incredible L&W content and the fleet and network of games that Grover brings to us. So I'd say that's going better than expected and just really excited about the opportunity that Grover presents.

We have David Fabris with Macquarie.

I'm just trying to understand the guidance for 2025 with the $1.43 billion to $1.47 billion EBITDA range. Did I hear correctly that includes $65 million for Grover? Because wouldn't that assume that the underlying business is coming in below the $1.4 billion? And then just to follow that up, I mean, in the release, you kind of spoke to the fact that with your customers, you've seen some cautious purchasing and delayed CapEx. Can you maybe talk about how that plays out for the rest of 2025 and why that may change to support hitting the guidance range? And then just a little bit more color on those international sales through the second half. Can you maybe share the countries you're selling the units into and the quantum of sales so we can get, I guess, a better understanding of how to think about shaping 2025?

Yes, absolutely. A bit to unpack there, but we'll do our best. From a guidance perspective, like I said, we're targeting $1.4 billion in the base business, so the top end of that range. We're pushing hard towards that. Team is committed to delivering on it, but we have a range of outcomes where should we see investments that would set us on a trajectory to get to that 2028 number in the second half, we'll make them. We'll make them, and that could mean that we miss that $1.4 billion by a very minimal margin when you think about the context of where we've come from back in 2022. So we're running the business, optimizing it for the long term, still chasing that $1.4 billion number. We're not going to do anything silly in terms of taking cost out to manufacture a result. We'll take the best decision on balance. So yes, that's what I want to say about that. I'd say about operator apprehension in early Q2, I think that was a real thing. I think many investors spoke to operators back then, it was a tumultuous time in the markets. If you remember, Liberation Day, escalating retaliatory tariffs. I would say things have largely turned positive in that light. Every operator that I speak to, and I've been speaking to a lot of them over the last few weeks is ahead of their budget, which is where they all want to be. That means they deliver their bonuses. So that's important to them. GGR is solid. I think the operating environment is in a really good spot. So I think it's turned positive relative to where it was in early Q2. And if you cast your mind back, that period for all of us, it was a bit of a lot of unknowns in the marketplace. So I think net positive on market. I think that was reflected in the Eilers survey yesterday. But in terms of the construct, Oliver, of the forecast going forward in terms of the markets, do you want to touch on that?

Yes. I think we've got some opportunities globally, and that's -- I think that's the beauty of the international presence that we have. I think in the third quarter, we'll see continued kind of momentum here in North America. I think we've -- even in the Q2 print, still had a very strong overall total units sold. And as we kind of move into the second half, Canada VLT as we really scale up the Mexico facility here, we're already starting to ship those units out. And I think that's going to be an opportunity for us here in the second half. We'll see an uptick in Asia, as we mentioned in Q4, that will be, what I would say, a combination of replacement units as well as some new openings and expansions, both in that region as well as here in the U.S.. And so I think there's a couple of different avenues that we're going to work through. Ultimately, what we have in our BMS is we have a target list of opportunities that we manage. So Siobhan and the team are hyper-focused on every single opportunity in the space between now and the end of the year, and that's what we're going to execute on between now and December 31.

We have a question from Ryan Sigdahl with Craig-Hallum.

I want to move over to SciPlay Social Casino. You mentioned sweepstakes. But curious, you mentioned some of those states that you're seeing more attractive dynamics as the states crack down and press back in sweepstakes. Is it possible to shift UA spend and marketing spend and really just resources specifically to those states that are regulated against sweeps with better seemingly ROI and dynamics in them? And then secondly, kind of in the quarter, I guess, how much of the margin benefit was a shift in spend versus the benefit from D2C kind of thinking as we look forward from a modeling on what to think from a margin standpoint in that segment?

Yes. I'll try to tackle that, too. I think the good news for SciPlay is we're outpacing the broader social casino market. We've got some very fast-growing games in Quick Hit Slots and 88 Fortunes. Then as you kind of zoom out and you look at the sector more broadly, I think at this point, it's undeniable to say that sweeps are having an impact on the social casino segment. It's definitely a substitute. I mean in our mind, it's unregulated, untaxed iGaming. There's no denying that. And when we look at the data specifically around the markets where sweepstakes have been banned, you see a significant uptick in terms of social casino. So from our vantage point, there's just no denying it's had an impact on the social casino markets where sweepstakes is active. But we like to focus on the things in our control at Light & Wonder. That's outside of our control, and we'll watch on as industry pundits like the rest of us. But the things inside our control are really getting Jackpot Party to where we need it to be. We've rewritten the economy there. We've got the A team working on it. Josh is in the cockpit himself. driving a lot of the changes. I believe that we'll get that game back to where it traditionally has been. I mean the good news is for Jackpot Party is it's cycling over easier comps in the second half. And so we see solid momentum from June into July, but we want to see that play through, and we've got the team working really hard to make sure that comes into effect. The other area that we can control is direct-to-consumer, and I'm proud to say the team has done a fantastic job this quarter, really ratcheting that up. They went from 13% PTC in the first quarter to 18% in the second quarter. We've given out a guidance in the 28 guide that we get to 30% as a driver of the social casino business. Clearly, with the trajectory we're on, we'll get there sooner than 2020, hopefully a lot sooner. But I think the team has really leaned into the things that it can control. And I'm proud of what they're doing, and I see continued momentum in the back half of the year. Oliver, do you want to just touch on UA and how we throttle that back?

Yes, it's a great question. So obviously, we've been talking about this over the last several years in terms of how we want to be able to scale monetization over time while still maintaining a relatively strong DAU base. What I would say is that Josh and the team are now kind of focused on, you would see some of this through some of the Carnival partnerships that we've had through Jackpot Party as an example, very focused UA opportunities that are now starting to drive DAU back into the ecosystem, which is exactly what we want to do to be able to sustain levels of growth over time. So Josh and the team, Noga and the team are looking for opportunities to deploy UA effectively here. And ultimately, like I said, drive monetization sustainably, and that's going to be something that we're going to be focused on over the coming years. So that's what the teams are working towards.

Your next question comes from Justin Barratt with CLSA.

I just had a question on free cash flow. Again, a relatively another weak quarter, and you call out reasons for that. But I appreciate that there's obviously targets to improve that free cash flow conversion over the long term. But is there anything, I guess, in the real near term that we'll see that conversion materially improve?

Yes. Thanks for the question. So yes, when looking at free cash flow, I think it is important to kind of normalize that for the impact of these one-offs. And so we did kind of call out this legacy litigation payment of $73 million. If you take that out and normalize the free cash flow absolutely saw a considerable year-over-year increase to over $100 million. So we continue to kind of benefit from increased earnings, efficient working capital management as we work through the quarters. And obviously, we think this normalized view is a reflection of kind of how we see growth in free cash flow and what we're capable of doing that as a business. So overall, I'd say it's positive. And in fact, if you look at kind of a free cash flow to NPATA on an adjusted basis, that represents a 77% conversion rate, okay, on a normalized basis. So that's a 23-point improvement over the prior year. And actually, if you look at a trailing 12 months, still kind of driving growth. So yes, to your question, we are remaining focused on that. I think if you look at the base business and again, the highly cash generative nature of our business now through Grover on top, this will certainly provide healthy, sustainable cash flow generation. And I would say, if you look -- again, look at it from a normalized perspective, that's what we would expect as we move forward.

Your next question comes from David Katz with Jefferies.

So one of the things -- the themes that's been coming up among your operator customers all earnings season is the updated tax structure in the United States that appears to favor investment in things of a shorter useful life, such as slot machines and associated equipment. Are you having any of those conversations? Is that coming up at all? And should we look at that as a tailwind for you?

Yes, that's a great question, David. So yes, the one big beautiful bill, certainly, there's a lot to unpack there. It's a pretty dynamic set of legislation. But I think to your point, there are really 3 main provisions that will impact not only our business, but also our customers that we're working through. So I think the 3 things are really around domestic R&D expensing. I think the second one is bonus depreciation. And then the third is just kind of interest expense limitation changes. So let me just quickly unpack the 3, and we are certainly having conversations with our customers around these things. But I think on the domestic R&D side, that certainly now allows us on certain R&D investments to be expensed immediately. So if you think about kind of yesterday, that would have been amortized and capitalized over a 5-year period. We can now take that as immediate depreciation. The bonus depreciation on the equipment, now this is where it actually helps us and our customer base. So this gives us a bit of flexibility in terms of providing immediate tax deduction on our gaming ops business. And then to your point, from a CapEx point of view on our operator side, they get to take some of that depreciation on the game sales and purchases that they make. So that, along with kind of cash tax savings will, in our estimation, support demand in the second half and really not just this year, but over the next several years. So I think, by and large, we will continue to kind of obviously manage and monitor kind of the changes here. But the one last thing I'd call out here is the bill actually does drive and potentially drive an annual cash tax savings for us of about $40 million to $50 million. So this bill certainly benefits not only Light & Wonder, but our operators. So I would expect this to drive some momentum here in the second half.

We have a question from Rohan Sundram with MST Marquee.

Just the one for me. Can you please walk us through the revised NPATA guidance? I understand it's now $550 million to $575 million. Apologies if I've missed it, but it was $565 million, $635 million previously. I take on board the commentary around the increased investments, but just wondering what's -- but that's in the AEBITDA line. And I just take on board your comments around the tax savings. So can you help us with what's changing at the below AEBITDA line to get to the new guidance?

Yes. Yes, great question. Thanks. So I think a couple of things there. While Grover and I'll start with Grover is a strong driver of AEBITDA growth, as we've indicated in previous calls, it is modestly accretive to NPATA when you start to factor in things like D&A and interest expense. So park Grover for a second. I think a couple of other items that we'd call out here is we took advantage of dislocations that we saw in the market with incremental share repurchases here in the first half, and that drove and will drive higher interest expense for the year. But more importantly, it's also contributing meaningfully to kind of the EPSa growth that we'll have by year-end. And then based on kind of the momentum that you would have seen in our gaming ops business, D&A was elevated just based on the levels of CapEx, success-based CapEx that we put into the business. So I think those 2 items, I would say, are quite favorable to us from a business perspective, but also our shareholders over the long term. And then a couple of other pieces, there's a slight income tax headwind that was primarily related to our tax rate, and that's really driven by some SBC timing and then the price at which those vested as well as our geographic income tax mix that will obviously have varying rates depending on the jurisdictions where we are a global company at the end of the day. So that will certainly have what I would say, more impacts on the NPATA range relative to AEBITDA. And then lastly, we had talked about the AEBITDA, the new AEBITDA range that Matt mentioned earlier. And that certainly then calls out the potential risk that we have, just acknowledging the fact that fourth quarter AEBITDA growth rate is fairly sizable. And though we have line of sight to it and in Matt's point, we are executing to the top end of that range, and we just want to be more transparent about that. So those are, I would say, over the long run of the business, we feel like these are just great examples of how we drive accretive NPATA over time, but we'll work through that. And then I think in terms of the one big, beautiful bill, I think the primary impacts that we'll see is actually not at the NPATA line will be the cash tax savings that we'll have. So that will actually drive free cash flow more so than NPATA at this point.

We now have Andre Fromyhr with UBS.

I just wanted to ask about margins and in particular, the margin optimization initiatives that you've been talking about. I see year-on- year R&D has come down and corporate costs have come down. Just curious to understand how sustainable is that? Or is it more a seasonality question? Or how much more opportunity is there to make savings on those lines? And then also related to margins, is it reasonable to expect that there'd be pressure on gross margins at the moment? I see you've reported average sales price up 2% year-on-year, but would cost be growing faster than that at the moment?

Yes. Thanks for the question. So yes, obviously, margins and margin enhancement, near and dear cash flow enhancement, the sister program now in place near and dear to my heart, clearly, as a finance guy. We grew margins, to your point, 400 basis points, you at 44% in the quarter. So we continue and we will continue to focus on optimization across the business. I think Matt made a critical point there that we're not cutting investments in R&D to kind of make near-term targets. So we'll continue to kind of focus on these things as an organization to drive sustained levels over the next several years. I think for the balance of the year, I would expect margins to remain relatively stable here through 2025. I think if you think about the Grover gaming contributions, gaming ops continuing to scale, that's going to drive higher margins for us. Matt mentioned DTC uplift 18% for the quarter. We see that scaling prudently here over the coming quarters and years. kind of the shift of 1 PP and really the focus that Nathan and the teams have driven in the iGaming space will help us again drive higher margins. So I think we've got ample room to continue to invest Nate MacGregor, Matt mentioned again, Nate MacGregor, Kelsy Foster. We're going to continue to kind of drive the right levels of investments to be able to sustain our growth trajectories over the next several years.

Yes. And we have no intention of scaling back R&D. If anything, we're just really focused on making sure we maximize ROI in every dollar that we spend. We have very clear investment thresholds, and we make sure that the studios are meeting those. I think you can see in the new premium release games in the Eilers charts, we have a seasonally high 44% of the new games in that report. So the R&D engine is firing on all cylinders is a testament to Nathan Drane, all the work that he's doing, and we want to scale that over time.

Yes. And just one last point, I think you brought up corporate earlier. Obviously, that's an area that we also focus in on, but that's also due to some timing of legal expenses. It's a bit lighter here in the second quarter that could continue to potentially ebb and flow here between now and the end of the year. So we'll continue to monitor that.

We have Thomas Forte with Maxim Group.

Great. So one question as it pertains to SciPlay. Any updates on changes in economics following the Apple Epic Games legal battle and consumers being able to pay SciPlay outside of Apple's platform? Are you seeing any changes in consumer purchase frequency when they pay you directly versus using Apple Pay as an example?

Yes. Obviously, that's a very favorable ruling for the entire games industry and kind of opens up new pathways and avenues. One, to optimize margins, so you're able to kind of capture some of the value through those platform fees but also have a more direct and intimate relationship with your users. So we mentioned at the Investor Day in May, our VIP portal that we're building, which is as much about having that player intimacy as it is about transacting. We watch it very closely. We're trying to obviously capture more value when they come and purchase directly, but we mimic some of those offers, and we're not trying to exacerbate the frequency of purchases. We're trying to maximize long-term engagement. So we see that ruling as favorable for margin enhancement, but also for player engagement over the longer term.

Our final question comes from Adrian Lemme with Citigroup.

Yes, I just wanted to focus on the premium lease space in the U.S. You obviously do have a number of games firing at the moment. Can I focus on Huff N' Puff because I think that was the main replacement for Dragon Train? The Eilers survey looks to show it fading in terms of performance in units installed. So I'm just wondering, is that what you're actually seeing in the business? And if that is the case, what are the plans to reinvigorate that game, please?

I'm glad you asked that question. 845 incremental adds. It was an exceptional result. And the Eilers survey didn't reflect that yesterday. There's a little bit of panic in the market. But we are very confident in the momentum of our gaming ops business, proud of that number. It's one of the kind of top 5 quarters we've had in terms of net adds. And it really just comes back to game performance and game design. And we've got a broad range of games that are performing really well. Huff N' Puff Hard Hat did a really fantastic job for us in terms of making sure we maintain that Dragon Train fleet. It's like many other games, atrophies over time, but it's one game amongst a huge arsenal of games. I'll point you to that 44% of new games -- new performing games, industry-leading. I'll point you to Huff N' Puff Grand, #1 WAP game in the marketplace to MONOPOLY Express. We've got a lineup of games coming to G2E that the industry has never seen. Really next frontier stuff, a product called Lightwave. Some people would have seen it at the Investor Day with a new Frankenstein game on that, a new Jackpot Party game on that. We are very excited about the direction of travel for gaming operations, and we're pleased to be able to print the number today and just quell any nerves out there about gaming ops. It's a powerhouse in our portfolio. We've just added 11,000 units for Grover. We're on a great trajectory. And yes, Huff N' Puff Hard Hat one game amongst many, but we're off to the races when it comes to installed base growth there.

Yes. And just one add there, obviously, to Matt's point about global portfolios and just depth and breadth that we have. It gets maybe perhaps lost in the shovel here, but I just want to reemphasize a point from an RPD perspective, revenue per day. If you normalize out and just put again, Grover aside for a second, our RPD from a base recurring revenue perspective has grown and back to what I would say is normalized growth rates that we talked about over the last couple of quarters. So great momentum not only from an installed base perspective, but the quality to Matt's point, and that's what gives us a lot of comfort. And really, we're excited about what's to come, especially at G2E.

I can confirm that does concludes the Q&A session. I would like to hand it back to Matt for some closing comments.

In closing, I want to thank our teams around the world for their continued strong execution and unwavering commitment to performance. The industry backdrop remains healthy, and we expect to leverage the strength across our business to capture growth opportunities in the quarters ahead. We're particularly excited with our recent acquisition of Grover, which we believe will be a transformative addition, bringing new capabilities, deepening our customer relationships and expanding our global reach. Finally, our transition to a sole listing on the ASX marks an exciting new chapter for the company as we continue to execute to our initiatives to create shareholder value over time. We're also looking forward to showcasing our innovation and connecting with customers and partners at AGE next week and G2E in October, and we hope to see you there. Thank you again for your continued support, and I look forward to speaking with you soon.