Good morning, everyone, and welcome to the Inspired Entertainment Third Quarter 2022 Conference Call. [Operator Instructions] 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 2022 earnings press release, which is also available in the Investors section of the company's website at www.inseinc.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 included 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 very much, operator, and good morning, everyone, and thank you for joining our call this morning. With me, as usual, are Brooks Pierce, Stewart Baker and Dan Silvers..

one, drive high digit -- high double-digit growth in our high-margin capital-efficient digital businesses addressing the gaming, lottery and sports-betting verticals; two, manage our land-based businesses for mid-single-digit growth, while reorienting our business model in a way that significantly reduces its capital intensity; and three, combine these 2 yield in an overall business that is growing faster, has higher margins and far lower capital requirements.

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These 3 in turn allow us to more than adequately fund our overall growth objectives while at the same time attending to our balance sheet. Our net leverage right now is below 2.5x And as mentioned in the press release, we have repurchased more than 1 million shares so far.

Notwithstanding the currency inflation and supply chain issues mentioned earlier, our EBITDA in the quarter was about equal in consensus suggesting that the underlying business is close to hitting on all cylinders. Our overall EBITDA margin, though a healthy 37%, was down from about 39% in 2021.

But more than all of this decline was a result of inflation and supply chain issues unique in our holiday parks segment. In a moment, Brooks may elaborate on that a little. But as we move through the fourth quarter and into the first quarter of next year, we expect that this situation will have been remediated. .

As we've mentioned before and as we've been targeting, our digital businesses grew to account for a little over 50% of our EBITDA on the quarter, up from 36% a year ago. And what happens otherwise to be the seasonally strongest quarter in the holiday parks segment, at least from a revenue point of view.

The star of the quarter once again was our Virtual Sports business, which established records for revenue, EBITDA and margins. Specifically, revenue and EBITDA grew, respectively to $14.6 million and $12.6 million in 2022 from $10.5 million and $8.6 million a year ago, about a 50% increase in EBITDA in a rather remarkable result. .

While the majority of the recent growth has come from outside the United States, we're getting excellent traction with the Pennsylvania Lottery, the DC Lottery and Ontario iGaming. And we're cautiously optimistic that there are many more important developmental opportunities in the North American market.

There is no seasonality to this business, the Virtual Sports that we can see, and there were no onetime revenues or other events in the quarter.

So effectively, the Virtual business at the moment is generating EBITDA at the run rate of $50 million a year, which just so happens to be more than twice what the entire EBITDA was of Inspired Entertainment 5 years ago. .

Growth in our Digital Interactive, or iGaming business, was more moderate in the quarter as we wait for contracted new customers and product enhancements, as Brooks will talk about in a moment, to come on stream.

Revenue in the month of October for the Interactive business accelerated to 14% year after year, and we feel that we are pivoting back upwards to a higher rate of growth.

Of particular note here is that we will shortly be launching our second iLottery game with the Quebec Lottery following the extraordinarily successful launch of our first game earlier this year. .

The Betfred contract mentioned in the press release represents a very critical element in our overall strategy. With about 1,400 retail locations and 5,600 terminals, Betfred is our largest customer in the U.K. server-based gaming market.

Historically, this market has evolved our making the capital investment to create the installed base of terminals and earning a return over the life of the concept. .

In the Betfred model, we will be selling the terminals and then supplying on an ongoing multiyear basis, content and tactical services.

Here again, we're cautiously optimistic that in the relatively near term, the majority of our customers will move to this model so that our retail business will become effectively an extension of our digital business. We supply content and tactical support on a recurring multiyear contract basis, but we do not supply capital.

I should also mention that Betfred is a very important customer for our Virtual Sports and iGaming products, illustrating even greater synergy between the 2 sides of our business. And with this, I'll hand it to Brooks to elaborate in more detail. .

Okay. Thanks, Lorne. Excellent summary of how we view the business, and I'll try to give some more detail and insight on each of the operating segments..

So let's start with the digital businesses, which, as Lorne mentioned, now contribute more than 50% of our EBITDA and are the areas of higher growth and higher margins with less capital intensity, which we expect will continue to scale nicely.

Our Virtual Sports business had another outstanding quarter, growing on a functional currency basis at the revenue line by 63% and EBITDA at 75% and compared to Q3 of 2021 and by 12% and 13% -- or 12% of revenue and 13% of EBITDA over our previous quarter, again on a functional currency basis.

This segment continues to perform at an extremely high level with a number of key drivers still to look forward to, notably the plans we're building on for the North American market. We're now live with 2 lotteries in the U.S. and several gaming operators in both New Jersey and Ontario.

We're very encouraged by the responses we received at both G2E and the World Lottery Summit in Vancouver, with an increased pipeline of opportunities developing based on the success we're seeing for Virtual Sports on a worldwide basis. .

The segment continues to show strong organic growth in both online and retail across a number of geographies, and we expect to add additional territories to build on this base.

A good example of the popularity of the product is in Greece, where we expanded our menu of available products and increased the frequency of the events and saw 17% growth last month in what's a very mature market.

We're excited to launch our home run shootout product this quarter with icons like Babe Ruth and Mickey Mantle and other legends of the game and expect it will be very popular in many key markets. .

And lastly, we expect to see a bump from the World Cup this month as there will likely be increased footfall in many of our betting operator shops in retail and increased interest in our most popular sport, soccer or football depending on who you're talking to, and our online channel. Needless to say, we're very bullish on this business segment. .

Moving over to the Interactive or iGaming segment, which showed 10% growth in functional currency in the quarter as well, although somewhat moderated from our growth rates experienced during COVID.

We're starting to see the benefit of our launches in Pennsylvania with Q3, only having , Rush Street for the full quarter and DraftKings for just a few days in the quarter.

BetMGM will be going live this month, Caesars will be going live next month, and we're still hopeful to add FanDuel in Pennsylvania and our other key markets of New Jersey, Michigan and Connecticut. .

Interestingly, where we are live with FanDuel in Ontario, they already represent close to 10% of our business there, so we have high expectations when their resource challenges free up and we can get them live in all of our jurisdictions.

We're also introducing some key product enhancements like our first progressive games in North America planned to go live in Q4 this year.

All of the above plus continued growth in key markets like Greece and the Netherlands, the launch of a number of new titles throughout the fourth quarter and the holiday season bode well for this business going forward and going into 2023. .

We also have gone live with our second iLottery game in Loto-Quebec and are looking to expand this footprint in other jurisdictions worldwide as we build out our library of iLottery content. So clearly, we believe there's great momentum in the segment.

And as we've seen from our October results, a number of positives that we see for all of our digital businesses. .

Moving over to the retail side. We are gratified to sign a new 5-year contract with our largest customer in the U.K. via machine totals and shop locations, Betfred.

The Vantage cabinet will be rolled out to the Betfred estate in 2023 after its successful trial this year that produced a meaningful uplift in the cash box and middle locations where it was on trial. We expect strong demand for this product from all of our LBO customers in the U.K.

and we'll also be introducing this product in the pub segment of our Leisure business. .

In Greece, we continue to see impressive results with Q3 win per unit higher than any other Q3 since our first launch in 2017, and this is with significantly higher number of machines deployed. We're at the early stages of discussions with our customer in Greece on replacement cabinets for those that have been there since inception.

And with over 9,000 terminals deployed there, we believe there's a great opportunity to drive incremental value in a mature market with new cabinets and industry-leading content. .

Lastly, we're very encouraged by the opportunities discussed at G2E with additional operators in the distributed games markets where we have already proven our success in both Illinois and Western Canada.

As Lorne mentioned in his remarks in the Leisure segment and specifically, the holiday parks, is where we face headwinds on a cost basis from inflation and cost of goods sold unique to that business. .

The revenue across the Leisure segment held up very well across pubs, holiday parks and motorway services, but margins were impacted by the aforementioned cost issues.

We continue to believe strongly in the opportunity in pubs and motorway segments, but clearly we need to rectify some of the cost issues in the holiday parks part of the business as we move forward. .

With that, I'll hand it over to Stewart for his comments.

Stewart?.

Thanks, Brooks. Good morning, all. For the first time since the pandemic began nearly 3 years ago, we're now in a position where we have a clean quarter in both the current year and the prior year. Of course, each quarter has its nuances, and we'll go into 1 or 2 of these.

But overall, it is like-for-like in terms of trading restrictions or lack thereof. .

One area where it's not like-for-like though, is in exchange rates, which were 118 in the current year and 138 in the prior year. We're looking at the average for the quarter of 112 at the balance sheet date versus 135 a year ago.

This is why, as with the last quarter, we're trying to make clear the underlying trading of the business by talking about functional currency results. .

Now this is imperfect as costs incurred in U.S. dollar will still show us more expenses in great British pound for a stronger dollar, but it is certainly more useful in our view than looking at just reported numbers.

And there's no better example of this than overall quarterly revenue, which declined 3% when looking at reported numbers, but grew 13% in functional currency, with all business units growing revenue year-on-year.

Virtual Sports, as mentioned, was yet again the standout segment with growth of 63%, but Interactive also grew 10%, Leisure 6% and gaming 3%. And these latter 2 segments would have been slightly higher had it not been for the closure of certain venues as part of the mourning for the death of the queen in the U.K.

And it's also worth noting that gaming had a high quarter of product sales in the prior year, which, as we mentioned before, do fluctuate quarter-on-quarter. .

Now in addition, sequentially versus the second quarter of this year, all segments were up in functional currency. Turning attention to adjusted EBITDA. We saw growth overall of 7% compared to the same quarter in the prior year, driven by Virtual Sports growing 75% on a functional currency basis.

Sequentially, quarter-to-quarter, EBITDA increased 13%, driven by seasonality in the Leisure segment, but also Virtual Sports growth of 13% and Interactive growth of 4%. .

Now like many other businesses, we are facing some cost challenges from factors outside of our control, such as inflation in terms of salary costs, fuel costs and utility costs, and any purchase where the underlying cost is in dollar. Now as you'd expect, the impact of these is seen within the parts of the business with higher costs.

To some extent, gaming and pubs within leisure, but mainly in the holiday parks business, where our cost of sale includes noncash prices, the cost of which has risen significantly year-on-year. .

We have a track record of dealing with costs that need to be taken out of the business. For example, after the reduction in stakes in the U.K. gaming market as part of synergies after the Novomatic Technology Group acquisition or during COVID lockdowns, and we will do so again to mitigate these challenges. .

Looking further down the income statement, net income for the period was $10.2 million. This compares to $7.5 million in the second quarter of this year. Last year's equivalent number was $25 million, but this included an accounting gain on the fair value of warrants of $17.3 million.

There are no items that we would consider as accounting anomalies in the current quarter or in fact, year-to-date. This left basic earnings per share of $0.39 in the current quarter and $0.72 year-to-date. The diluted equivalent EPS numbers are $0.35 and $0.66. .

Turning attention to cash flow. We started the quarter with $31.8 million and ended it with $37.4 million, an increase of $5.6 million. This would have been higher without the FX impact, with British pound rates reducing from 121 to 112 between the 2 balance sheet dates.

In addition, included in the net movement was a repurchase of shares in the quarter of $5 million, taking the year-to-date total to $10 million. .

CapEx in the quarter was $9.3 million, taking the year-to-date total to $31 million, and we would expect the fourth quarter to be lower than other periods. But even so the full year number will be above the long-term average of $30 million we've talked about a lot.

In part, this is due to one-off purchases that we needed to make this year but also because we brought forward some investment. .

We were asked on the prior earnings call if buying back stock would mean a reduction in the ability to make the most of opportunities in front of us to accelerate growth. And as you can see, this is not the case. We have the ability to do both.

And finally, a note on net leverage, which is now down to 2.4x from 3.7x a year ago due to increasing EBITDA, higher cash and reduced U.S. dollar equivalent debt balance given the movement in exchange rates. .

So with that, I'll hand back to Lorne for any remarks before opening up to Q&A. .

Thank you, Stewart. That was very good. I have no further remarks at this time. Operator, so if you could open up the program to Q&A, please. .

[Operator Instructions] Your first question comes from the line of Barry Jonas with Truist Securities. .

Correct me if I'm wrong, but the virtual business and pipeline looked to be heavily lottery operator focused. Is that somewhat a function of the lower volatility of the product relative to traditional sports betting? I would just think that this could be even more attractive for commercial operators given how the World Series just played out. .

Well, if we steered in that direction, that wasn't intentional. I mean, obviously, lottery is a very big channel for us, in large part because from a retail perspective, there's a huge number of locations where the gain can be played. But we feel very strongly about the sports betting operators and having this as a core product for them.

And Barry, as we've talked about a number of times, the RTP is favorable from an operator perspective. There's not the risk of a loss like you saw in the World Series. So we think it's only a matter of time before it's going to be a core offering for both the sports betting operators as well as the lottery segment. .

Barry, just to elaborate sort of slightly on that. It's not a direct danger, but it's interesting is that so many of our major customers outside of the United States of customers like Lottomatica, Caesar, OPAP in Greece, in fact, are the major lottery operators in those countries.

So this kind of signals up to us that in the fullness of time if the main lottery operators in North America, which happened to be the states and provinces rather than private operators like Lottomatica or OPAP will eventually jump on the product. And of course, if we got the same kind of response there as we've had in Europe, then all bets are off. .

Yes. Yes, that makes sense. And then just for a follow-up question. At a high level, curious how you're thinking about M&A here.

Is there sort of a checklist for you for identifying appropriate deals and then executing?.

Well yes. We're -- I think right now, we're more focused on M&A that gives us technology or product or platform expertise to fill out our menu rather than acquiring revenue or EBITDA per se. We don't feel like we need to go on and buy earnings, but we -- not that we wouldn't if we had the opportunity. .

But for example, in our Interactive business, as we've talked about, our game development expertise is phenomenal, and we can see that in our lottery business and in our iGaming business.

But there are some, let's say, ancillary features or platform features that we haven't developed essentially because we haven't had time because we're so focused on the game. .

So we think we could make it a very immediate quantum step up in the scale of our Interactive business, if we could more quickly fill out the features of our platform. So one of the things we're looking for is possibly an acquisition -- an M&A opportunity that would do that for us. .

Your next question is from the line of Ryan Sigdahl with Craig-Hallum Capital Group. .

Congrats on the strong results and the clean results. I want to start with Betfred. I see the extension there, improved terms as well from a capital efficiency standpoint.

Can you discuss the impacts to revenue margins and EBITDA in 2023 with the equipment sales? And then what that looks like in 2024 and going forward from a service standpoint?.

Yes. I think the -- so the equipment sale is really at cost. So there's not -- this is not a onetime sale gain event. So -- and I won't get into the terms, but they're certainly no less favorable than where we are. .

I think what we'll hopefully see and what we've seen in the trial for Vantage Cabinet is a pretty significant uplift the cash box. So that's one of the things by rolling out new terminals with new features, we're hopeful that we'll get some uplift from that side. .

It's safe to say a higher revenue next year at 0 margin, and then you get the high margin flow through after that?.

Yes. I mean I was just going to add into that, Ryan, because there will be a significant sale to Betfred deliberately at no margin. Because the idea is -- by doing this, then effectively Betfred is making the capital investment that we would otherwise have made. .

I would expect that our equipment sale -- overall equipment sales margins next year, obviously, will be down because there will be a significant sale to deliberately -- at no margin to Betfred. And when the time comes next year, and we report that sale, obviously, we'll point that out that we were anticipating that to happen.

So if you see next year a fall in the gaming margin, it has nothing to do with the health of the business. It's simply the business model where we're slowly but surely grinding our way through eliminating the capital investment. .

Yes. Ryan, I think we would expect to give clarity on what the normalized margin would have been at the time so that it's clear what portion was there a margin and what you should think about on a stabilized basis. .

No, it certainly seems like an improved contract. I just want to make sure expectations are separate. .

But in terms of going forward, I think there's no doubt that it will produce a significant increase in both EBITDA and margins on an ongoing basis because, as Brooks said, that the cabinet itself in trials in the U.K. has produced a significant uplift in revenue -- in the cash box. And our revenues are a percent of the cash box.

Our costs are essentially fixed and have nothing to do with the revenue. So as we drive more revenue with a higher performing cabinet and have fixed costs, obviously, the margins will get better going forward. .

Understood. On the Interactive, so I just want to move over. So how much visibility do you have to the iGaming launches that you mentioned? I appreciate the detail kind of by operator and jurisdiction.

But are those firm dates where you know that's when they're going to launch, I guess, or are those best guesses?.

Well, so for the ones that I mentioned, BetMGM is firm. As I'm sure you know, there's a number of steps that have to happen both from a technology standpoint and a regulatory standpoint. So the BetMGM one is locked in because we have visibility to that. Caesars, we feel very confident about. FanDuel is the one that I mentioned.

But obviously FanDuel, if you look at the numbers, it's roughly 15% to 20% of every one of those markets. .

And other than Ontario, we're not participating with them, even though the Ontario numbers are great. So it's a pretty big gap not to have FanDuel in our customer profile. And so obviously, as soon as we can get that done and go live with FanDuel, we will in all the markets. .

Great. One last housekeeping.

Did you actually repay any debt in the quarter? Or was this sequential decline entirely FX?.

No, it's just FX movements, Ryan. .

Your next question comes from the line of Chad Beynon with Macquarie. .

Brooks, you mentioned positive reception from G2E this year with respect to VLTs in Illinois and in Canada. Can you remind us -- just remind us where things are in Western Canada in terms of placements? Any new opportunities? And then any other performance metrics in Illinois that would kind of help lead to higher market share. .

Sure. Well, so Western Canada will deliver the big order, 800 machines in the fourth quarter. They're just now starting to hit land in Canada as we speak. And Western Canada does a yearly RFP cycle. So obviously, we went from 100 machines and now we'll have over 800 machines there. .

So hopefully, again, assuming the games perform as the first ones have, we would hope to be able to get -- with their next RFP, to be able to get significant share. And the other markets that are probably closest to the horizon in terms of distributed gaming are Oregon and Alberta.

And we obviously -- I think we've mentioned we've had discussions with them at G2E. .

In terms of Illinois, I would say it's a mixed bag. In certain parts of the state, our games are performing very well. In the Chicago land market, not as well as we would hope, but we've actually just rolled out a couple of new games that we hope will show some positive impact this quarter.

But as Chad as I'm sure you know, I mean, Illinois is now really fully a replacement market because they've added the 6 machines. They've increased the stake limit. So it now really is just kind of a fight for market share with the IGTs, Light & Wonders and Aristocrats of the world. .

Great. And then the obligatory question about the U.K. white paper following a new Prime Minister. Any updates just in terms of how you're thinking about when we could potentially hear something and kind of what your partners are doing in the market. Just anything to be aware of for the next 3, 6, 12 months. .

Yes. I'm not sure if I can talk about, with great certainty, anything going on in the U.K. political landscape right now. But yes, the -- I think there's a couple of things to say on that. One is the expectations of the white paper. Yes, it's been an unknown, but probably starting next year, not hearing any rumblings of significant changes.

But the ministers that are in place now, we think, so we see sensible ministers for the gaming industry. So yes, we don't expect any significant changes. But as the timing, I can't say with any certainty. .

[Operator Instructions] Your next question comes from the line of Edward Engel with ROTH Capital. .

Nice set of results. Just wanted to kind of check in on the state of the U.K. consumer. I mean, third quarter results kind of speak for themselves. It looks like it's still steady as she goes.

But just kind of wanted to confirm that even in October and November that things are still relatively steady?.

Yes. We're not seeing any changes even through October. So everything that you read about the U.K. economy doesn't seem to have impacted gaming play for us, at least based on the results. And obviously, we see these real time. .

Perfect. And then within Interactive, I saw you added just 6 games during the third quarter versus 22 in the first half.

Was that part of the reason of the lower sequential revenue growth? And then now that you kind of have more bandwidth after the Pennsylvania launch, should we expect kind of game releases to get back to that 10 to 12 a quarter, which kind of implies maybe a bit more of acceleration in revenue because of that?.

Yes. That's actually a good catch on your part. And yes, we've got a pretty good lineup of holiday games. We had a bunch of games that went out for actually Halloween and produced some very nice results. We've got a bunch of Christmas games, that will go out.

So yes, the fourth quarter will certainly have a significantly higher number of game launches than the third quarter. And as Lorne mentioned in his remarks, the October numbers were very strong. .

Your next question is from the line of David Bain with B. Riley. .

Great. I guess first, Lorne, on the PR, you cite an exciting pipeline of new products that could open up significant new avenues of growth that you're going to speak to in the coming months. I'm hoping you can maybe give us as much as you can on these.

I mean, if it's Virtual Sports, iLottery, new concepts, new contracts, all of the above kind of what we're in for it kind of left me wanting that comment. .

Sorry. Sorry, Dave, I couldn't help. Well, I think the same that I can take out of what you just said, Dave, that I would agree with is the all of the above part. We're going to be introducing a number of platform enhancements in our iGaming businesses Brooks talked about. We have a couple of terrific things coming in Virtual Sports.

I think they're probably a couple of most exciting things going on. But we won't be saying any more about those until they're at a point where we feel we can make a public statement. .

But let's just say that we're very, very excited about a couple of things that are coming along in Virtual Sports that would only further accelerate the growth that we're already seeing. .

Okay. Fair enough. And let me choose the second one.

I guess my second one would be -- and I don't know if this makes sense, so maybe Stewart or Dan, is there a way to lock in current currency exchange when it comes to the debt or use the most recent leverage as an opportunity to continue to refine the structure of the balance sheet somehow?.

Well, I mean, technically, yes, there is a way to do it.

I think for a number of reasons, we've always taken the position that we formulate our capital structure in order to sort of match our general currency exposures of our business, but that we are unlikely to put financial hedges in place against our capital structure that we try to explain very clearly exactly how we're set up to investors.

And if investors want to do their own hedge, then that's probably a more appropriate way to do it than our trying to make a directional bet on currency movements. So yes. .

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

Thank you, operator. I think the things we've talked about so far pretty much speak for themselves. I think, again, other than the unfortunate decline in the pound that at least now seems to have abated, run its course, we're very happy with the quarter. We're accomplishing exactly the things that we set out to accomplish.

And we're obviously very excited about where things are going to be heading in the next few quarters. So thanks for joining this morning, and we'll see you in a few months. .

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