Good morning, everyone, and welcome to the Inspired Entertainment Third Quarter 2021 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. Please note, today's event is being recorded.

I'll begin today's conference call by referring you to the company's safe harbor statement that appears in the third quarter 2021 earnings press release, which is also available on the Investors Section of the company's website at wwwinseinc.com.

This safe harbor statement also applies to today's conference call as the company's management will be making certain statements that will be considered forward-looking under securities laws and rules of the SEC.

These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties and changes in circumstances. In addition, please note that the company will discuss both GAAP and non-GAAP financial measures. A reconciliation is considered in the earnings press release.

With that completed, I would now like to turn the conference call over to Lorne Weil, the company's Executive Chairman. Mr. Weil, please go ahead..

Thank you, operator. Good morning, everyone, and thank you for joining our third quarter conference call. Here with me today are Brooks Pierce, Stewart Baker and Dan Silvers. As we anticipated in our last conference call in August, we had a strong third quarter, and we're quite pleased with the results.

EBITDA of $30.1 million exceeded the high end of our guidance. We achieved these results despite the modest decline in the value of the pound as compared to dollars and the fact that the U.K. fully reopened in July, a few weeks later than we had expected, effectively imposing headwinds on us for about 15% of the quarter.

Nevertheless, some historical comparisons, I think, are very interesting. Excluding last year's onetime VAT income, the $30.1 million EBITDA in the third quarter of this year was 89% higher than the $15.9 million in the third quarter of 2020, which as we might recall was a ramp-up quarter prior to the second lockdown in the U.K. in November of 2020.

And it was 70% higher than our prior high watermark of $17.7 million established in the fourth quarter of 2019, immediately following the Novomatic Technology Group acquisition. And finally, if we go all the way back to the first quarter of 2019, which was the last quarter prior to the implementation of the Triennial, we're 120% ahead of that.

So I think it's safe to say we're hitting on all cylinders at this point. The overarching narrative behind these trends is pretty much what we have anticipated for several quarters. Our retail gaming businesses in the U.K. and elsewhere rebounded to pre-pandemic business levels.

And at the same time, our Virtual Sports and Interactive businesses continued unabated along the growth path they had established at the outset of the pandemic.

The comparatively high margin and low capital intensity of these content businesses is the primary reason our net cash flow was so impressive in the quarter, about $13 million, as highlighted in the press release.

From where we stand now, we expect that the Interactive and Virtual Sports businesses will grow on a combined business to account for about 50% of our EBITDA in 2022, further enhancing our overall margins, capital intensity and inherent growth rate.

At the same time, we believe that by the end of this year, our net debt to run rate EBITDA will have declined to below 3%, the target we established for ourselves at the time of the Novomatic acquisition. Our expectation, of course, was that we would have reached this point sooner. But in the meantime, there was the small matter of dealing with COVID.

In a moment, Brooks will discuss in detail some of the developmental activities that are driving our growth. Each of our Virtual Sports and Interactive businesses is growing through expansions into new jurisdictions, new customers and new products and content.

In virtuals, the Major League Baseball Players Alumni Association licensed home run-hitting competition as the latest and most exciting example of new content. In our Interactive business, we continue to exhibit impressive growth as we introduce 3 or 4 new games every month and improve our shelf space within the existing customer base.

Earlier this year, we launched an initiative to diversify our Interactive business into the lottery space. And a couple of weeks ago, we announced our first iLottery initiative with Loto-Québec, one of the premier lottery operators in the world.

And lastly, as Brooks will discuss in a moment, we continue to get great traction in the North American VLT market. And with that, I'll hand it to Brooks..

Okay. Lorne, thanks. It's great to be able to speak about the operational aspects of the 4 segments of our business when, as you say, everything is hitting on all cylinders. I'm also excited to give some additional color on a number of the business developments that we've discussed in previous calls.

I'd be remiss if I didn't thank the entire Inspired team for their hard work to produce the results that you just covered in your remarks, and it's rewarding to see what this business can do when so many of the headwinds which we had faced have dissipated.

I know I speak for the entire team when I say that we'll continue to stay laser-focused on the things that have brought us to this stage of our development, and we're incredibly encouraged with the opportunities yet in front of us.

And as Lorne mentioned, we increasingly see our business evolving into content-led, primarily online businesses on the one hand and retail gaming on the other hand. So let's start with retail gaming and the Leisure segment specifically, as they just finished a record quarter with 92% revenue growth over the comparable period.

And for the first time, we've been able to see the true earnings power of the business that we acquired from Novomatic in 2019. Across the holiday parks part of the business, we've seen excellent results that have continued through October as well.

In our pubs business, we've seen the business rebound as restrictions have abated, and we continue the investments we've previously discussed in this business to get us to 100% connectivity and a larger portion of the estate being digital going forward in 2022 and beyond.

We believe we already have the highest-performing content and cabinets in this business, but we also believe that we have plenty of runway left as we develop content specifically for the sector that can widen our lead. Finally, our motorway services businesses benefited from the increase in travel within the U.K., which led to growth in this segment.

We're looking to build on this momentum in 2022. Moving over to the Interactive business. We continue to see growth in mature markets like the U.K.

and Greece, which we built upon with growth in the North American market from existing jurisdictions like New Jersey, Michigan and Québec as well as the prospects of additional jurisdictions, including Pennsylvania, Connecticut, Ontario and Alberta.

Our Interactive revenue grew 73% over the same period last year, and we currently sit at just over 60% penetrated in New Jersey and Michigan with the addition of DraftKings in the Michigan market. We've also gone live with bet365 in the Netherlands is one of the early operators in the market.

This growth in the number of markets in which we operate and our share on these markets is being driven by the quality of our content, as well as the number of games we're releasing every month. This is truly building a network effect and we expect this trajectory to continue.

An example of some of the product innovation that we've also gone bringing to the market is in the fourth quarter of this year, we'll be launching our Space Invaders license game, which is getting a lot of anticipation from operator customers.

We're also able to announce, as Lorne mentioned, our first iLottery customer recently with the first 2 games going to Loto-Québec. Already we've had great feedback from the lottery industry on our entry into the market as they believe the addition of EA instant games to be a big part of the digitization of that industry.

We expect this to be an area of focus for our business going forward and we'll report on the progress of that as it develops. Next, we're excited about the growth of the overall of the Virtual Sports segment around the world, and in particular, the growth online.

Virtual Sports overall revenue grew 27% compared to the same quarter last year and grew 67% online. As we've mentioned in our last call, we believe the North American market has vast potential.

And we've now gone live online with BetMGM in New Jersey and are in the process of understanding the nuances of growing a product that is completely new to players in this market. BetMGM is a great partner, and we've done some joint promotions that have proven successful.

Furthermore, we are in the midst of doing a major customer-focused project with their players to make sure we are hitting the mark with the product or if there's anything that we need to tweak.

In terms of the rest of our markets, we're seeing great results and traction with new products in Italy, including Marbles, Matchday Ultra and Penalties and with the U.S. basketball product in Greece.

And finally, on the product side, we're excited to announce our licensing deal with the Major League Baseball Players Association -- Alumni Association for our Home Run and Shoot Out, and we think this product will resonate in North America, Latin America and Asia.

We had mentioned previously a number of players that were part of the deal, but I'm happy to announce today that we have secured a license to now include Babe Ruth in the game, and our development team has already started creating some interesting ways to showcase this property.

In our core gaming business, we're happy to see that the business returned to at or above pre-COVID levels in our key markets of the U.K., Greece and Italy, even with some of the restrictions on needing to show proof of vaccination or a negative COVID test in some key markets to enter a betting shop.

I think this demonstrates the resiliency of this part of our business. In Italy, as we've discussed in the past, our plan is to move to a content and platform business as opposed to a full-service business. And we took the first steps in that process with the sale of our existing terminals in Italy to our customers Caesars.

We have plans to be fully completed with this plan by the end of the year, and we'll expect modest improvements in the margin contribution of our Italian retail gaming to our bottom line. Our Virtual Sports and Interactive businesses in Italy are not impacted by these changes, and as discussed, we see tremendous growth potential in both.

Moving over to North America. We continue to see growth of our machine count in Illinois, and we've already exceeded our Q3 sales in the first month of Q4.

In Western Canada, our VLTs are the top performers, and we will be responding to the WCLC RFQ with that experience now under our belt, which we believe can only help there and in other provinces in the future in Canada.

And finally, we've shipped our Valor terminal to the Oregon State Lottery for their early review, and we would hope to qualify it to go to trial there in 2022. And we see not only Oregon, but West Virginia as key future markets for us. So with that, I'll hand it over to Stewart to go through some details on the numbers.

But needless to say, we're excited about the business we've built and its prospects going forward..

increased cash flows. So to reiterate what Lorne and Brooks have said, we do feel that we're hitting on all cylinders. And with that, I'll hand back to the operator to open up to Q&A..

[Operator Instructions] Our first question comes from Barry Jonas with Truist. You may go ahead..

I wanted to start with iLottery.

How are you thinking about the ramp in that business? And should we expect some early investments to flow through the P&L before revenues start to meaningfully grow?.

Yes. Barry, yes, so I think we'll start -- we probably won't start to see meaningful income from that until the revenue from that until probably the second half of next year. But we plan to be live in the first half next year with Loto-Québec, and we're in discussions with a number of other customers.

So it's kind of what the spend will be is on what we need to do to build a library of games. But as you probably expect, what we're taking is kind of existing content that we have in our iGaming business and modifying it as well as some kind of new stuff.

So yes, there will be some increased spending on game development in the short term, but the revenue impact to come in the second half..

And just as a follow-up, anything -- any thoughts on the M&A environment here, pipeline? Anything out there that interests you?.

I'll let Lorne answer that one..

Well, most recently, Barry, is I think we've been focused on all of the things we need to do to take full advantage of the opportunities we already have. But we're always open and looking for M&A ideas. As I mentioned, I think our leverage is now going to be down to where we have significant financial flexibility.

Our share price has obviously moved in a way that helps us. So the M&A search process continues to be an important part of what we're doing from a business development point of view. But obviously, if there were anything specific right this second, I wouldn't be able to talk about it anyway.

But certainly, the opportunity to enhance the development of the business through M&A is something that we're well aware of and we're pretty heavily focused on..

And if I could just sneak in a quick one.

Any updated timing for PA for interactive license or any expectations there?.

No. Unfortunately, we had -- kind of every month, we hope that this is going to be the month that it happens. Now internally, since we're kind of through a good portion of November, we would expect even if we got on the agenda in December that we wouldn't be live until the first quarter of next year.

But it's completely subject to the Pennsylvania Game and Control Board putting us on the meeting agenda..

Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. You may go ahead..

Nice results. One question to follow up on the iLottery opportunity. How much of your content do you think can be used for iLottery relative to iGaming? And then do you think there's an opportunity to be integrated into the U.S.

iLottery states?.

Yes. I mean that's where our -- that's certainly where our target is, is North America. So even though the first one was in Canada, we're having discussions with a number of lotteries within the states. And in terms of the content library, I think we're up to now just over 150 games.

So there's some mechanics that you need to change and some game style and themes. But it is a good basis for us to be able to evolve into the specific needs of iLottery game. So we're not starting from scratch, which is great.

So -- and we think, quite frankly, some of the stuff that we've shown is the lines are -- tend to be blurring a little bit between iGaming and iLottery. And we've shown some stuff that we think with the experience we've had in iGaming will resonate in the iLottery market very well.

And I think that's the feedback we're getting from customers that we're showing that to as they feel the same way..

On Interactive, switching over, any update on the launch timing with FanDuel and Rush Street Interactive there?.

Yes. I would say FanDuel is going to be longer than we had hoped. They've got some -- we just actually had some folks meeting with them earlier this week. They've got a big pipeline of issues that they're dealing with from a technical resource side.

So it's probably going to be a little longer than we had hoped, but I would expect that would be in the first -- hopefully, in the first quarter, but certainly in the first half next year. Rush Street is -- could be imminent. We're just dealing with one last issue with Rush Street. So I would expect Rush Street to be pretty imminent..

One more for me.

Anything that would lead you to believe Gaming, Leisure, and really the whole company, is down year-over-year in Q3? Trying to get a sense for kind of normalized earnings profile here and then adjust for seasonality from there?.

Ryan, can you just clarify that? I think we all looked at each other and not.

Sorry.

So looking at Q3 numbers, anything in there to adjust for onetime acceleration costs, et cetera, where it's not a good number to run rate kind of as a true normalized profitability of the firm, albeit adjusting for seasonality between quarters, but looking at this as kind of the everything-coming-together moment?.

Yes. I don't think -- yes, Ryan, it's Lorne.

Certainly to the best of our knowledge and understanding, there isn't anything either on the plus side or the minus side in the third quarter that would cause the third quarter not to be able to be modeled other than the one point I mentioned, which was that we weren't actually completely open for the entire third quarter.

That half of July was, as I mentioned, let's say, a headwind. So a normalized third quarter without the delay in the opening would've probably meant that the third quarter would actually have been a little better..

Our next question comes from Chad Benyon with Macquarie. You may go ahead..

I wanted to ask actually kind of the same question just in a slightly different way. If we lump together, I guess, Virtuals and Interactive which have less seasonality, you currently generated a little over $16 million of revenue, $12 million of EBITDA. Combined, that was up, I guess, about $2 million sequentially.

Is this kind of the foundation of maybe those combined businesses? I believe the only seasonality aspect to that would be maybe the Virtuals -- the retail Virtuals in Italy. But I guess -- yes, kind of asking the same question.

But those segments, is this kind of a good place to maybe grow from going forward given all the content and new partnerships that you talked about?.

Yes. I mean, as I said in my prepared comments, Chad, we expect that the continued growth in Virtuals and Interactive would -- and let's make the assumption that we don't have any anticipation that the retail part of our business won't grow modestly, certainly won't decline year-to-year.

So if on that basis, analytically, we expect that Interactive and Virtuals will be half of the EBITDA in 2022, then you can do the math to figure out where it needs to grow to from where it is this year. And I think that's consistent with the observation you just made..

And then, Brooks, just on the North American Gaming business. Could you elaborate a little bit more just in terms of -- you said Q4 sales into Illinois exceeded Q3, then you talked about some potential opportunities in Oregon and West Virginia.

Can you just talk about the similarities of the games in Illinois? Why or why they would maybe not perform as well in Oregon and West Virginia? And then maybe if you could just kind of frame out the total market sizes, if you want to mind as well..

Sure. Well, in terms of the games themselves, yes, there are some modest differences in West Virginia and Oregon from Illinois on bonus features and things like that. But frankly -- and we actually have teams heading to both jurisdictions yet this week to see kind of the latest greatest.

So we don't think there's a whole lot of work that we'll need to do on the content side to be able to make the games succeed in those other markets like they have so far in Illinois and Western Canada. In terms of Oregon, you probably are familiar with the process.

But basically, what you do is if they're interested in you, they first take a look at your terminal just to make sure that it's something that they want. And then eventually, what they do is give you a trial, and that can be anywhere from 500 to 1,000 machines. And then assuming you're successful in the trial, then you go forward.

In terms of West Virginia, they're in the midst of the beginning -- or probably the beginning parts of a replacement cycle. It's a mature market, the route-based VLT business in West Virginia. So we've been pretty consistent on the focus that we've had for going after the route-based businesses.

And taking everything that I just talked about, plus additional provinces in Canada, we think there's plenty of addressable market for us for the -- certainly for the next couple of years..

Our next question comes from David Bain with B. Riley. You may go ahead..

Congrats on a great quarter, and I appreciate the new presentation, bifurcation of segments. It's nice. I guess where I would start since most of mine have been asked, the Virtual Sports online mix, are there some data points that you can offer to give us a sense as to how penetration is progressing in the U.S.

relative to the mix that we see in Europe? And if that's varying by skin, are there certain data points you can take from those that are maybe promoting the product differently and use within your captive customer base to kind of help move that segment forward?.

Yes. It's -- unfortunately, it's probably just too early to do that. I think a quarter or 2 from now, we can probably give some color. I think we're focused right now in the states on making sure -- as I talked about in my prepared remarks, making sure that we've got the product exactly right. And BetMGM has been a great partner and supporting of that.

So I think we're not going to roll out this product to additional markets or even frankly, to additional customers in New Jersey until we're 100% sure that we've got the product right and that we understand what the North American players. Because remember, this is a brand new -- it's a brand-new product for North American players.

And the ecosystem of sports betting is really very young in the states as well. So most of the growth -- well, almost -- well, 100% of the growth that you're seeing in the numbers is coming outside of North America, but that obviously gives us great hope as we go forward that we're just in the very, very early days in the states..

Dave, this is Lorne.

I'm sorry to interrupt but -- I was going to mention this actually a second ago when Brooks was talking about -- or answering the question about the iLottery business and the opportunity to use the content that we've developed in iGaming to, let's say, reskin it to be used in iLottery, which -- and as it happens, we think the opportunity to do that is obviously enormous.

But the thing I was going to add is we actually think that there is a great opportunity in lottery to use the Virtual Sports content. Obviously, not games that last 60 or 90 seconds like they do in the virtuals business, but to use the graphics in the plate. Let's -- like this home run hitting competition that Brooks was talking about a minute ago.

Redone in a way, I think, could make a phenomenal lottery products. So I think one of the other ways we're going to see -- it may, at the end of the day, be the dominant way our Virtual Sports technology monetize in the states, I think -- I personally think is going to come much more than we might have thought before from the iLottery business..

And maybe as a follow-up to that, and I know this has been sort of asked, but the iLottery EBITDA margins.

If you could speak maybe to the cadence of that just given what you were just saying, Lorne, with regard to content sort of already being there, can we see margins near Interactive or online virtual over, I guess, the intermediate term? Can we get margins where -- those types of margins faster than we did when you launched Interactive? I mean, any way to think about how profitability looks in iLottery and the ramp there?.

Yes. Sure. I think the -- it's reasonable to assume that the margins will be at least as high as Interactive, if not higher.

What we're seeing in Interactive and the beauty of being in a B2B business, which we're in obviously as opposed to the B2C business, which has very different economics in our business, is that we can already see that our business scales tremendously.

Because when we create a new game, if we have 50 customers to sell that game to, then obviously, the margins are going to be hugely higher than when we developed that game and we only had one customer to sell to. So the big margin determinant in that business for us is how much we can scale the content development.

So the benefit that we have in iLottery is we're piggybacking on the content we've already developed in the iGaming business. So all other things remaining equal, I would expect that our iLottery margins -- of course, it also depends upon how we allocate the cost of the content development people.

But just to -- all things remaining equal and to keep it simple, there's every reason to think that the iLottery margins would be at least as good as Interactive, if not better..

This concludes our question-and-answer session. I'd like to turn the conference back over to Lorne Weil for any closing remarks..

Thank you, operator. I don't really have anything to add to what we've talked about so far this morning. Obviously, we're feeling pretty good about where we are. But by the same token, we're not taking anything for granted.

We understand that to maintain the leadership that we have in the businesses we're in that we have to continue to invest in all of the parts of the business that determine our competitive position, and we have every intention of doing that. And therefore, we're pretty [Indiscernible] in terms of where we think the future is.

So thanks for joining this morning, and we look forward to speaking to you in another quarter. Bye..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..