Light & Wonder Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 12 speakers on the call.

Operator

Welcome to the Light and Wonder 20 24 First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. And I would now turn the call over to Nick Zangari, Senior Vice President of Investor Relations.

Speaker 1

Thank you, operator, and welcome everyone to our Q1 2024 earnings conference call. With me today are Matt Wilson, our President and CEO and Oliver Chow, our CFO. During today's call, we will discuss our Q1 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.

Speaker 1

We will also discuss certain non GAAP financial measures. A description of each non GAAP measure and a reconciliation of each non GAAP measure to the most directly comparable GAAP measure can be found in our earnings release located in the Investors section of our website. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website. With that, I will now turn the call over to Matt.

Speaker 2

Thank you, Nick, and thanks to everyone for joining us today. Our Q1 performance marked a great start to 2024 for Light and Wonder, building on the momentum that we've created since we began our transformation journey and affirming our position as the leading cross platform global games company. During the Q1, our team did an outstanding job executing our strategy and meeting our financial and operating objectives. Oliver will provide more details in his financial comments, but we are extremely proud to deliver our 12th consecutive quarter of year over year growth and our 6th consecutive quarter of double digit revenue growth across all lines of business. The gaming industry has proven to be resilient in today's macroeconomic environment with healthy consumer demand fueling our impressive growth.

Speaker 2

These strong results confirm that we are investing in all the right places and in the right talent, providing innovative content and cutting edge technology that enhances the players' experience and builds a loyal customer base. We will continue to execute diligently with a focus on driving sustainable long term growth. For Light and Wonder, it's all about the game. Our aspirations go beyond just one brand or franchise. We are fortunate to have a robust and diversified roadmap both in engaging and dynamic game content for players to enjoy across all of their favorite channels.

Speaker 2

With that, let's turn to our operational highlights for each business. In gaming, we continue to make significant progress on our journey. And given the quality of products this year as an inflection point, without scaling our game ops fleet in a meaningful way. As many of you have heard, our Australian born hit franchise Dragon Train has arrived in the U. S.

Speaker 2

And is expected to contribute to gaming operations growth this year. In fact, Dragon Train debuted as the top new franchise with 4 of its titles in the top 10 indexing new premium lease games on the Irish report. Our commercial team is collaborating with our operator partners and being strategic with placement as we continue to optimize the floors for performance while preserving the longevity of our existing units. That said, our North American premium installed base has grown for 15 consecutive quarters and now represents 49% of the North American installed base. Just recently, we also launched our new large screen jumbo cabinet Horizon with Dancing Drum's Ultimate Explosion and it's off to a strong start.

Speaker 2

Our execution on licensed titles is second to none as Monster's Frankenstein continues to perform well on the charts with more placements on the floor. We are prudent with license spend with a disciplined focus on ROI and this gives me the confidence that we will capitalize on the upcoming launches such as Squid Game in the near future. On to game sales, during the quarter we shipped close to 9,700 units globally with broad based strength across the board and achieved number 1 ship share in Australia for the first time ever in the company's history. We see opportunities outside of the traditional North American and Australian replacement markets as we further deliver units into international opportunities and adjacencies such as shipments to Asia, specifically Macau, Philippines and South Korea in the quarter. In the adjacent markets, we are progressing well with the Oregon and Canadian VLT shipments with rolling sales into the Georgia coin operated amusement machine market as well as various other video lottery, Class 2 and historical horse racing market.

Speaker 2

Will continue to working towards gaining share in the North American market on the back of our wide array of successful franchises such as Blazing 777, Huff and Moore Pass, Big Hop Flaming Pot, Lion Link and Goldfish. On to systems and tables, our revamped strategy of enhanced collaboration driven by innovation is expected to provide sustainable momentum, further solidifying our leadership position with a focus on increasing recurring revenue streams by expanding system software and maintenance services and table product subscription as we continue to be the innovative thought leader in the space. Overall, we have strong conviction in gaming's growth trajectory as we continue to build on our hardware, brands and franchise extension With recent data showing our hit game half and even more past indexing as the number one overall new core game and Light and Wonder occupying 12 out of the top 25 games on the new premium leased and wide area progressive chart. We are well positioned to capture the opportunities ahead of us. Turning to sideways, where our steady outperformance continues as we delivered another record revenue quarter, up 11% year over year driven by continued growth in our largest four games, jackpot party, quick hit slots, Goldfish Casino and 88 Fortune slots.

Speaker 2

We continue to gain share in a stabilizing social casino market as we have for the last 9 quarters and are now at over 11% market share. The investments we've made in our SiPlay engine and user acquisition are bearing fruit and the results are reflected in the strength of our portfolio of games. Meanwhile, average monthly revenue per paying user and average revenue per daily active user once again reached new heights as we continue to execute on our prudent and sustainable monetization strategy, one that is proven to work very well as we navigate seasonality in the business with favorable results. The marketing campaigns launched in the quarter solidify our conviction of investing in opportunities, which are expected to generate attractive payback periods to fuel sustainable long term engagement and monetization. SciPay is the best in the industry in terms of user acquisition execution, which we've demonstrated consistently in our performance.

Speaker 2

In addition to executing to our marketing blueprint, some of our other growth initiatives include testing and scaling of new games and taking learnings to drive success for next phase progression into ad tech. Most importantly, we've made meaningful progress on our direct to consumer platform in the last 6 months with approximately 6% of revenues generated from this channel in the Q1. Our focus here is to proceed deliberately, ensuring a high quality user experience to encourage player engagement. Overall, we see this as a great long term opportunity as we continue to refine the platform and scale it across our game. With SiPlay's clear strategy and focus on roadmap execution, we are differentiating ourselves as one of the clear leaders in the space.

Speaker 2

Onto iGaming, where the robust industry growth we saw in North America propelled us to another record revenue quarter. Our OGS platform delivered record gross gaming revenue volumes in the U. S. And Canada as we saw year over year increases of 23% and 29% respectively. This impressive growth was further accentuated with our content strategy and roadmap.

Speaker 2

In fact, we continue to see stellar performance from our 1st party content with ultimate filing cash flows reflecting solid performance, continuing the success we've seen with our proven land based franchise. Elk Studios and Lightning Box continue to perform above expectations, a testament to our OGS platform providing valuable insights to their game data prior to Light and Wonder's acquisition of these high performance studios. Elk Studios GGR is up 34% compared to prior year, driven by strong performance across Pylots 2 and Cygnus 4. Lightning Box had a record GGR quarter with sequential growth of 12% supported by strong launches from the Thundering series. WayZito has also begun to scale with 9 studios now live connected to 72 operators across 10 markets as we continue to build on the accessibility and scalability of our iGaming network.

Speaker 2

Live Casino continues to be an important part of our overall iGaming portfolio as we continue to invest and optimize our offering. We continue to see progress and believe that our collaboration with operator customers will ultimately solidify long term partnerships as we scale and expand into other regions in the future. IGaming is one of the fastest growing segments in the gaming space as we continue to see within the U. S. Market in the quarter.

Speaker 2

We will continue to expand our content portfolio and cross launch our proven land based and digital native games along with enhanced capabilities and new features added to our existing offering, rounding out our robust iGaming portfolio to capitalize on legalization opportunities in the future. With our unmatched market position and cross platform capabilities, Light and Wonder has created a compelling value proposition. Our results clearly demonstrate that we are delivering the iconic content that players want with the ability to choose where and when they want to play their favorite Light and Wonder game. Across our business units, our industry leading talent and high performance culture are the key to our past success and provide confidence for our future. We will continue to enhance our talent and invest in our culture to drive innovation and promote the lasting impact of our product offerings.

Speaker 2

Importantly, we will support our creative talent and strategic initiatives with disciplined R and D investments that drive long term sustainable value. Above all, we have a focus on operational excellence as we continue to extend our market reach And I want to thank the team for their dedication to this journey. I'm very excited about the momentum we are creating and look forward to the opportunities ahead for Light and Wonder in 2024. Best is yet to come. With that, I'll turn to Oliver to review our Q1 financial results.

Speaker 3

Thank you, Matt. I'm pleased to share that we started the year with strong overall performance, marking our 7th consecutive quarter of double digit consolidated revenue growth and 6th consecutive quarter of double digit revenue growth across all three segments. Consolidated revenue increased 13% year over year to $756,000,000 driven by continued momentum across all businesses. Operating income was $165,000,000 in the quarter, an increase of 62% over the prior year, primarily due to the higher revenue and healthy margins, along with lower depreciation and amortization and lower restructuring and other costs. Consolidated AEBITDA grew 13% to $281,000,000 compared to the prior year period, resulting in a consolidated EBITDA margin of 37% for the quarter on robust top line growth and our commitment to maintain strong margins across all of our businesses.

Speaker 3

Adjusted MPAD A increased 22% year over year to $105,000,000 primarily due to strong revenue growth across all of our businesses and healthy margins. I will note that we disclosed a reconciliation of adjusted MPAD A in our earnings press release along with other financial details in our quarterly Form 10 Q filed with the SEC. Our results reflect the collective and collaborative work of our business units. In gaming, we continue to deliver on strong financial and key performance metrics, a true testament that we remain focused on executing our robust product roadmap and commercial strategy. Revenue in the quarter grew 14% year over year to $476,000,000 led by another quarter of strong global gaming machine sales and gains across gaming operations and systems.

Speaker 3

AEBITDA was up 13% to $232,000,000 compared to the prior year with profitability primarily driven by revenue uplift in the period. A EBITDA margin was 49%, in line with prior year levels as we maintained healthy margins through our ongoing margin enhancement initiatives, while continuing to invest for future growth. Gaming operations revenue in the quarter increased 3% compared to prior year on continued growth in our North American installed base, primarily due to the successful launch of Dragon Trade in North America late in the quarter, partially offset by declines in international markets related to the fleet optimization that we previously shared. Importantly, revenue per day grew 4% in North America year over year, approaching $49 on continued performance of our license and proprietary games backed by our popular Cosmic, Mural and Cascada dual screen cabinets. Global game sales were robust in the quarter with revenue up 30% year over year.

Speaker 3

North American and international replacement unit shipments increased 14% 68% respectively, with North America driven by our ramp in adjacent markets and international driven by continued strength in Australia, new and expansion sales in the Philippines and South Korea, as well as replacement opportunities in Macau. Additionally, average selling prices increased 6 percent reaching approximately $20,000 in the quarter as we continue to place premium products into both the North American and international markets. In systems, revenue increased 9% year over year, primarily on higher hardware sales into existing and new customers. And lastly, table products revenue was relatively flat compared to prior year. Our results demonstrated the strength of our product portfolio and continued execution to strategy, which gives me confidence in our ability to maintain the strong momentum through the year as we expand into international and adjacent markets in addition to further growth in the North American Class III market.

Speaker 3

Moving on to SiPlay, where we continue to outpace our peers with another record revenue quarter, once again establishing ourselves as the industry leader in year over year growth in the social casino space. Revenue in the quarter was up 11% year over year to $206,000,000 on growth underpinned by robust player engagement and monetization, leveraging our dynamic live ops through the SciPlay engine across our portfolio of high performing games.

Speaker 2

I would like

Speaker 3

to mention that you may have seen a notable increase in our web in app purchases and other revenue line with meaningful uplift in recent quarters. Revenue from our direct to consumer platform, which has progressed nicely is reported in this line item. This subsequently impacts growth in the mobile line item that we and several other data platforms report externally. A EBITDA increased 15% to $62,000,000 year over year with a EBITDA margin of 100 basis points to 30% driven by continued revenue growth, partially offset by higher targeted and planned marketing spend, which has proven to be an effective growth strategy for SciPlay. While there will be user acquisition costs that are dynamic quarter to quarter, we will always take a prudent approach with a focus on long term return and expect that margin will scale over time.

Speaker 3

Our monetization metrics continue to set new records with average revenue per daily active user up 13% year over year to just over $1 on a steady base of 2,200,000 daily active users. Average monthly revenue per paying user was nearly $114 an increase of 17% compared to prior year, while maintaining payer conversion above 10%. We are pleased with the execution of SiPlay where we continue to see outperformance relative to the market. These favorable growth trends continue to be driven by our focus on engagement, retention, monetization and our cross platform strategy. We are confident in our marketing blueprint where dollars go further on high quality investment opportunities, generating meaningful returns to fuel sustainable long term growth and profitability.

Speaker 3

On to iGaming, where our offering and ecosystem continues to scale as the market continues to expand. Revenue in the quarter increased 14% year over year to a record $74,000,000 primarily driven by our strong content launches and U. S. And international market expansion. A EBITDA grew 9% to $25,000,000 largely on top line growth with A EBITDA margin remaining healthy at 34%, trending in line with historical levels, while we continue to invest in content and product development with a focus on future margin expansion.

Speaker 3

Wagers processed through our Igaming OGS platform increased 10% from our prior year period to a record $22,400,000,000 on healthy levels of engagement. Overall, we expect to extend our momentum through our original content and regionalized roadmap underpinned by scale and our well rounded portfolio. With our businesses firing on all cylinders, we will continue to evaluate processes for efficiencies, staying agile and nimble to adapt to changing environments to drive further operational excellence within the organization. This strategy has proven to be effective as reflected in our healthy margins we achieved in the quarter as we continue to invest organically in the business. Importantly, our teams will continue to maximize the efficiency of our business through enhancing processes and automation opportunities and committed to driving sustainable long term profitability through value enhancing initiatives.

Speaker 3

On to balance sheet and cash flow. At the end of the quarter, we had approximately $1,200,000,000 of available liquidity, including $450,000,000 of cash on hand. Notably, we received a 1 notch corporate family rating upgrade at Moody's in April on our strengthened balance sheet and meaningfully cash generative business. Our consolidated operating cash flow was $171,000,000 in the quarter and free cash flow increased 26% compared to prior year to $93,000,000 reflective of a strong earnings partially offset by less favorable changes in working capital and increases in capital expenditures. With the strong performance and demand of our newly released games, we expect an increase in capital expenditures in the coming quarters as we continue to invest for sustainable growth.

Speaker 3

The highly cash generative nature of our business and continuous efforts to improve conversion rates will allow us to further scale annual cash flows over time. We remain within our targeted net debt leverage ratio range at 3.0 times at the end of Q1 with enhanced optionality around capital allocation as our business continues to grow. During the quarter, we bought back $25,000,000 worth of shares. In total, we have repurchased approximately $600,000,000 or 80 percent of the $750,000,000 authorized program. As we generate incremental free cash flow, we will be opportunistic as we see value dislocations in the market while having a programmatic share repurchase plan now in place.

Speaker 3

With a streamlined business, we will continue to invest organically into growth initiatives for the long term. We will consider M and A opportunities that are complementary to our core business and above internal return hurdles as we further develop and deploy our robust R and D engine across platforms. We remain diligent in our efforts to prioritize shareholder value through capital returns and strategic investments. Our team has done a tremendous job at executing the strategy, elevating Light and Wonder to one of the fastest growing companies in the industry, underpinned by a healthy balance sheet and strong cash flows. Importantly, we are doing so in an efficient way with a prudent approach to reinvesting back into the business without compromising top line growth and R and D, a key driver of success here at Light and Wonder.

Speaker 3

This quarter is just another proof point as we continue on our journey to scale the business. I am confident in our ability to deliver on our roadmap and achieve sustainable growth towards our target and beyond. With that, we will turn it over to the operator for your questions.

Operator

Thank you. We will now begin the question and answer And the first question is from the line of Barry Jonas with Truist. You may proceed.

Speaker 4

Hey, guys. Wanted to ask about Sideplay. How are you thinking about the growth trajectory for here? And for DTC, you're up 6% now. How do you see that ramping and how high

Speaker 3

do you think it can get? Thanks.

Speaker 5

Yes, great question. Matt Wilson here, obviously. Yes, really proud of the exceptional results that I've been able to orchestrate again. They just go quarter to quarter, back to back of consistently taking share in the marketplace, really the only provider in the space that's doing that. One of the things I really liked about this specific result was the diversification in the result.

Speaker 5

There was a contribution by all 4 of our big games, Jackpot Party, Quick Hits Slots, Goldfish, 88 Fortune, all making meaningful contributions to the growth of this business in this last quarter. And I think that just gives us the confidence that we can take that playbook and expand it even further across more games in our portfolio. I know the team is working really hard to retool Monopoly. That's another game that we see contributing to our results in the future. So it's very impressive.

Speaker 5

I think DTC is another great example of how this team tackles big hairy problems. We kind of used 2,003 to pilot DTC. We're about 1% of revenues in 2023. In Q1 this year, like you mentioned, 6% of revenues coming through that platform. We see industry peers as high as 24%, 25%.

Speaker 5

So that's really the goalpost that we need to get to over time. It will take some time. We'll see it ramp up here in the Q2 and beyond. But yes, we see a long runway to having a successful DTC revenue stream down the line. Yes.

Speaker 5

And just

Speaker 3

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

Speaker 5

Yes. Maybe just one final call out for the SiPlay team. Obviously, headquartered out of Cedar Falls, Iowa, they've got a big team in Austin, Texas. They also have a huge team in Tel Aviv in Israel. So to put up this level of results over the last few quarters given everything that, that team has dealt with, just couldn't be more proud from that team.

Speaker 5

It's just a testament to their character, their teamwork and the contribution they're making. So it's just fantastic to have them back in the portfolio and really proud of the results and everything the Saipo team has done.

Speaker 4

Perfect. Thanks so much guys. Appreciate it.

Speaker 3

Welcome. Thanks Barry.

Operator

The next question is from the line of Chad Beynon with Macquarie. You may proceed.

Speaker 6

Afternoon, Matt Oliver. Thanks for taking my question. Wanted to drill down into unit sales, so nice year over year growth. Matt, you've talked about some of these adjacencies over the past couple meetings and earnings calls. Can you kind of flush that out just a little bit just in terms of where that opportunity stands with VLTs, COAM, etcetera, and kind of what's ahead in 2024?

Speaker 6

Thanks.

Speaker 5

Yes, great question. This is an exciting part of the gaming portfolio. I'm calling 2024 the year of adjacencies. We've been building towards this for a number of years, a lot of resources, a lot of R and D effort has gone into this and a really important part of our growth strategy for the gaming business, there's a number of markets coming online in late 'twenty three and then throughout 'twenty four. I think it's the continuation of the Illinois VGT market, which has been a great market for us for some time that's continuing to expand there.

Speaker 5

So excited about that. We see OSL as a multi quarter opportunity. We've shipped a couple

Speaker 2

of quarters worth of games. There's more

Speaker 5

to come with OSL. There's a few Canadian VLT markets that we have signed up and will transact with throughout 2024. As you mentioned, Georgia COAM has come online. We've got further expansion in HHR in 'twenty four. We've got West Virginia VLTs.

Speaker 5

So it is really a layer cake of opportunities. I think we typically think about adjacencies in these large tranches of gains and orders. But what we are actually seeing in our order book is these opportunities kind of layering on top of each other. I think if you look into the Q2 and Q3, you'll start to see a really strong contribution coming out of these adjacencies, but coming through in a diversified way that really gives us a great pipeline. So I think it sets up nicely.

Speaker 5

I think Siobhan and Nathan Drain and the team have been working really hard to get us in this position. And yes, 2024 will be a year where we get significant upside in those adjacent categories.

Speaker 6

Thank you very much.

Operator

The next question is from the line of Rowan Gallagher with Jarden. You may proceed.

Speaker 1

Matt, Oliver, good afternoon. Congratulations on the results. Gaming operations, obviously, most profitable segment within the gaming space. Probably a little bit frustrated with the lack of installed growth up until the last two quarters. We're starting to see that move with games like Dragon Train performing exceptionally well here in Australia.

Speaker 1

Can you unpack that in terms of your confidence in that inflection point towards realizing your targets for FY 'twenty four, 'twenty five, please?

Speaker 5

Yes, great question. I think the deck is stacked for gaming ops in 2024 for us. As you mentioned, we're seeing solid pipeline of opportunity here. I think we've just clicked off the 15th consecutive quarter of install base growth. I think we're now reporting 49% of our installed base in that premium category, and that's the one we care most about.

Speaker 5

That's the most profitable segment with the most opportunity. As you know, the North American installed base is comprised of premium gaming options in those public markets. It's really that premium category we're looking to drive. And I see that happening. So you can see that showing up in the RPDs.

Speaker 5

We're up 4% year on year in terms of RPDs. So that speaks to the premiumization of our in store base. And I think we're very well positioned for the remainder of the year. I'll give you 2 data points that supports that. 1, overnight, Eiler's reported their quarterly swap survey.

Speaker 5

If you look at the most anticipated gains on that list, number 1 was Dragon Train, number 2 was Squid Game, number 5 was Huff and Puff, Money Mansion. So yes, 3 of the top 5 most anticipated games in terms of what operators are looking for. Light and Wonder games, I think it was 52% of the total votes came from Light and Wonder products. So that just shows you the pipeline sets up really nicely for the remainder of the year. Another data point I'll give you, 12 of the top 25 new premium games on the recent Iowa survey were like 1 of the games as well.

Speaker 5

So you can see the games that are performing in our install base are doing really well, and then the games in the pipeline are highly anticipated. So I think the contribution across a breadth of product, including Dragon Train, really sets us up for a great year in 2024. I think you can expect a material pickup in installs throughout the remainder of

Speaker 3

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

Speaker 3

So very exciting.

Operator

The next question is from the line of Ryan Sigdahl with Craig Hallum. You may proceed.

Speaker 7

Hey, Matt, Oliver. I want to focus on international here a little bit. So continued strength in game sales outside of your core U. S. And Australia markets.

Speaker 7

It seems like your global platform is increasingly a powerful competitive advantage there. But curious anything you can share whether it be in South Korea, Macau, Philippines, etcetera? And what games and products are resonating for you guys?

Speaker 5

Yes, another great question. I think the international gaming category was a hero category for us. I think it's just one way where we are a significantly differentiated supplier in the space, given our global footprint, our product diversity, geographic diversity, we're not like many of the competitors in the space. We have a very diversified business. This category was up from a unit sales perspective 45% year on year, 45%.

Speaker 5

So just an amazing growth of that business. So hats off Simon Johnson, who runs our international business. I think really 2 part story that's driving this number. The first one is the ANZ market, which I think is a fascinating case study in the art of the possible. As a business, we have been a sub-ten percent player in that market for decades.

Speaker 5

We've been at this for nearly 4 years and all of the incarnations of this company, whether it's Bali or Shuffle Master or Star Games or Scientific Games. And, yes, we're just really proud of that team declaring on this earnings call first time in company history we were number 1 in the Australian market. So just don't get tired of talking about that level of success. So anyone that's listening on the line that played a role in that, if I had a hat on, I'd take it off to you. It's just exceptional.

Speaker 5

And we see many quarters and many years of runway to continue that growth trajectory. I think probably the second element to that is the Asia market, as you mentioned. So I think really the Philippines expansion is in full force at the moment. You saw some of that in Q1, but a lot more to come through the remaining quarters of this year. And then the other big driver is Macao.

Speaker 5

So we're going to see a regulatory churn to take place here in the next 12 to 24 months. And we're a 50% share player in that market too. So I think sets up really nicely and I think you can continue to expect the international gaming segment to contribute in a meaningful

Speaker 4

way. Great job guys. Good luck.

Speaker 2

Thank you.

Operator

The next question is from the line of Rohan Sundaram with MST Marquis. You may proceed.

Speaker 2

Thank you and good afternoon, Matt Olger and team and well done. Just the one for me in terms of how would you describe slot demand globally across the key markets from your customers? And how would you rate your forward order visibility in these key markets as well?

Speaker 5

Yes. Thanks, Ro. I'm looking forward to seeing you next week. Yes, I think from a macro perspective and if you're just looking specifically at GGR in North America, I think we observed like many did in the industry a little bit of softness in January weather related. And I think the remaining months of the quarter, we saw a bounce back in GGR.

Speaker 5

And the industry posted a really solid number. It's well up pre COVID levels. So I think that puts the industry on really solid footing. We're, from our vantage point, not seeing any changes in customer purchase behavior. And the order book looks really solid.

Speaker 5

And I think there's 2 things driving that order book for us. 1 is improving games. So again, back to the Eilers report, we had the number one game in the core space in Hough and even Moorpath and a variety of games from a variety of studios really driving that improvement in product quality. So that kind of underpins the order book that we can see looking forward. And then the other one is this adjacent story we just spoke about.

Speaker 5

These are discrete opportunities that are kind of well gives us good confidence in the remainder of the year. I think the other international markets are in different places. I think you're seeing Asia rebound off the lows in the last few years and really coming back to full strength. I think Australia is a consistent churn market that we're participating in there. So I don't expect any radical changes there.

Speaker 5

But I think on balance, industry is on solid footing. We watch the consumer and the macro very closely, but nothing in the end markets at the moment suggesting that there's anything to worry about there.

Speaker 3

Yes. And just a couple of very quick adds. Obviously, we do see solid data points from our coin and trending pretty well here in the quarter. And so to Matt's point, we see that. We see the GGR levels even in our digital businesses as well-being pretty robust here in the quarter.

Speaker 3

So to Matt's point, I think

Speaker 5

we don't see anything in

Speaker 3

the data points here that would suggest anything different, but that's why it's important for us as we start to think about margin enhancement and other initiatives that we're working through to be able to give us some flexibility over the balance of the year.

Speaker 2

Thank you. That's helpful.

Operator

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

Speaker 8

Can we just talk about 2 things? 1 is not a will you or won't you question, but we have this $1,400,000,000 number out for next year. Can we just go back over the sort of building blocks to getting to $1,400,000,000 and allow us to decide where those building blocks and how they stack up as we get into next year? And the second part of the question is really around cash flow conversion. And Oliver, how you see that evolving as we get toward that $1,400,000,000 ish number for next year?

Speaker 8

And even longer term, where can the cash flow conversion slide up? Thank you.

Speaker 5

Yes. Can't have an earnings call without that question, David, the first and the 1.4 percent expected Barry to lead off with that. But yes, still very, very convicted. Obviously, we've been out telling The Street every earnings call 1.4 percent is the number. If you speak to people here at Light and Wonder, it is our mantra.

Speaker 5

It is our North Star. It's a thing we're all chasing collectively. And we feel very confident we can get there. And I think this last quarter is another demonstration of operating momentum that puts us squarely on the trajectory to get to that $1,400,000,000 You won't see any hockey stick in $25,000,000 We see a nice kind of linear approach to getting to that $25,000,000 number. But a number of different pathways across all of these different businesses, I'll let all of us speak to this.

Speaker 5

He's very well versed on the pathways.

Speaker 3

On the pathways of the 1.4, yes. Yes. Listen, I think to Matt's point, nothing's really changed in terms of the building blocks too. So just very quickly from a gaming perspective, we've already talked about kind of the shared gains we have in the core kind of Class III markets, but the adjacent markets will be the critical component for us in gaming. And we're making really great strides here to Matt's point early

Speaker 5

in the

Speaker 3

call. SciPlay, we continue to see strong retention engagement and that's really driven by that SciPlay engine in the UA initiatives that we've consistently kind of put forth and we've really consistently outpaced our peers in these segments. So prudent monetization will always be kind of the key for us in strategy and DTC will also provide us some tailwinds here as we head into 2025.

Speaker 5

And I

Speaker 3

think from an iGaming perspective, we expect continued growth in the global markets, particularly here in the U. S. As you've seen really over the past few years. Our strategy remains pretty consistent there, which is just keep on deploying proven content, cross platform content and then really executing a very robust regionalized roadmap. So all of that coupled with the margin enhancement initiatives and the operational excellence that we're focusing as an organization will help propel us to the 1.4%.

Speaker 5

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

Speaker 3

Yes. And then David, to your free cash flow question. Yes, listen, that continues to be a key focus for us as a leadership team and as an organization. And we will see kind of conversion levels, especially here in free cash flow levels within the quarters kind of ebb and flow. There's some seasonality obviously related to timing of tax and interest payments, especially here in Q2 as well as timing of working capital and CapEx investments.

Speaker 3

But overall, we do expect our annual conversion rate to continue to trend favorably here over the coming years. We are not going to compromise long term growth to achieve a specific conversion rate. But as we scale, we will continue to invest in CapEx, like I mentioned earlier, or R and D to really be key drivers for us as we move forward. But our free cash flow increased 26% this quarter versus prior year, and that is really reflective of just the strong earnings and the highly cash generative businesses that we have, and we'll continue to benefit from that over the coming years. So yes, we're confident in being able to scale that over time.

Speaker 2

Thank you. Thanks, David.

Operator

The next question is from the line of Jeff Stancho with Stifel. You may proceed.

Speaker 4

Hey, good afternoon. Matt, Oliver, thanks for taking our question. Just one strategic question from us. Matt, I'm curious to get your updated views on the M and A landscape really across all three of your segments. Are you seeing interesting acquisition opportunities out there?

Speaker 4

And if so, how have asking prices trended over the last year or so as we start to contemplate higher interest rates for longer? Thanks.

Speaker 5

Yes, another great question and obviously one that comes into the frame when you get the balance sheet under control like we have. I would say two words characterize this management team and Board over the last 2 years. It's really focused and disciplined. And I think that's really what this business transformation has all been underpinned by. I think if you look at things that we've done in the space over the last, say, 2.5 years, things like the acquisition of Elk and Lightning Box, the iGaming Studios, that's squarely in line with our vision.

Speaker 5

I think another thing, if you look at the organic expansion of the R and D Studios, I think bringing Kelsey Foster online and building a campus around her in Reno. That's another great example of what we're about and what we're interested in. Really looking at opportunities that are close to our core. We have a clear North Star on who we are and importantly who we're not. I mean Scientific Games was this wildly diverse portfolio of assets across Lottery and Sports and Content and Land Base and Digital.

Speaker 5

We've chosen clearly a content strategy. We want to be the leading cross platform global games company. And we'll look and evaluate every M and A target that supports that mission and vision, but we're not in a hurry to go and put a huge amount of complexity back into the portfolio. I think there's a number of people in the industry dealing with complexity as it relates to M and A. We've been through that with a lived experience for the team here That comes with a level of chaos.

Speaker 5

So we've done a lot of work to clean up kind of the operating businesses and get this squarely focused at our vision. So we'll look at assets that help us project that further on, but not in a huge hurry to do a splashy piece of M and A.

Speaker 4

Great. That's helpful. Thanks Matt. Congrats on a nice quarter.

Speaker 3

Thank you.

Operator

Next question is from the line of Justin Barrett with CLSA. You may proceed.

Speaker 5

Hey guys, thanks very much for

Speaker 9

your time today. Matt, you just sort of touched on the balance sheet, but

Speaker 10

I was just wondering if

Speaker 9

you could expand. So look, your balance sheet could should sort of continue to fill downwards as you generate that improved free cash flow and then also maintain a level of buybacks. But how should we think about, I guess, the potential for further buybacks beyond this sort of $750,000,000 program? And then is there any chance that any form of dividend is reinstated near term?

Speaker 5

Yes. I'll kick that off and then hand it to Oliver. I think the answer to that is yes to both of those things. I think the organization is on a growth trajectory. We want to continue that, look for ways to invest behind that, both organically and inorganically, to continue that growth profile in perpetuity.

Speaker 5

We know that's what investors are looking for. We also think when there's dislocations in the share price, then it's prudent for us as capital allocators to think about share buybacks. We intend to continue to execute through the remaining portion of the $750,000,000 We'll come back to the market and explain where do we go to from here. But buybacks at these levels still seem very opportunistic to us. But Oliver, anything

Speaker 3

to add? Yes. No, I think largely speaking, we're going to continue to execute to the blueprint from a capital allocation perspective. And there's really not a whole lot of, I would say, structural changes that we'll make at this point. In Q1, we're now back at the midpoint of our targeted net leverage range, so between 2.5x and 3.5x.

Speaker 3

And to Matt's point, share buyback will absolutely be a key focus for us as we now put a programmatic plan in place. And that's including the potential of tools such as 10b5-1s and just more systematic repurchases. Matt also mentioned organic investments. That is certainly areas of our highest returns that we see and we absolutely see opportunities to continue to invest in talents and in the core business. But yes, I mean from a dividends point of view, we constantly engage and evaluate with the Board and really the best uses of capitals and uses of our funds to enhance shareholder value.

Speaker 3

Currently, we have no plans to deviate from our capital allocation blueprint, but over the next several years, sure, dividends can be something that we consider at some point down the line.

Speaker 10

Thanks, Scott.

Operator

The next question is from the line of Paul Mason with Evans and Partners. You may proceed.

Speaker 10

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

Speaker 5

Yes, I think this is really our company at its best. Like I said earlier, we chose a strategy of being a content company and then having 3 businesses in the portfolio. That all fed off that same idea of building great franchises and taking it across these three channels. Dragon Train is a fantastic example, started in Australia, moved to premium gaming ops in the U. S.

Speaker 5

You'll see it in the social casino space in June, and you'll see it shortly after that in the iGaming space. So really trying to cut down the lag time between building the game the first time and then deploying it across these three channels. We have our CTO, Victor Blanco, who's working on a platform, a GDK platform called Carbon, which will allow us to build a game one time and take that game very efficiently and effectively across all three channels. That's an investment that we're making. It's been worked on at the moment.

Speaker 5

It's not all the way to production, but when we get it there, we'll update the investment community. But yes, this is a key to our thesis that we build great games, we take them across these franchises. We also have, for the first time, some games coming back the other way. So coming from the social casino space onto a land based gaming floor, which is very exciting. And then also, we have the data going all different ways across the ecosystem.

Speaker 5

So AB testing games, rapid asset testing. So yes, we're really starting to maturate in the way we're leaning into those cross platform opportunities. And you'll start to see a shorter and shorter lag time between a game being built in one channel and being deployed in another.

Speaker 10

Okay. Thank

Operator

you. The next question is from the line of Alan Franklin with Canaccord Genuity. You may proceed.

Speaker 11

Yes. Hi, guys. Good afternoon, good morning, depending where you're at. But just wanted to touch on the margin dynamics, please. Appreciate there's some steady performance in that quarter for each of the business groups.

Speaker 11

And also, you had just noting that Q1 can be seasonally low. Just how to think about the margin progress over the course of the year, please?

Speaker 3

Yes. Hi, Alan. It's great to hear from you. Yes, I was very pleased with the results here in Q1. We continue to post very healthy margins, benefiting from our continued focus on efficiencies and the team could really continue to execute really well here.

Speaker 3

In gaming, our supply chain and cost initiatives have really helped maintain our strong margins and going forward as we further scale our gaming operations install base, we should continue to see margin scale with that over time. At SciFlight, there will be UA opportunities that will be available to us as we continue to take a prudent approach as we have this quarter through the campaigns that you all may have seen. But we are laser focused on long term sustainable top and bottom line growth. And as we mentioned earlier, DTC will be a key factor for us in margin expansion within SciPlay. And then in terms of iGaming, margins, we expect them to be fairly steady as we continue to expand on original contents, while we continue to invest in Live Casino.

Speaker 3

Over time, we do expect margins to expand in that business as we scale with more jurisdictions coming online. So we'll have a multitude of opportunities to expand margins over time and we're staying laser focused on our margin enhancement initiatives, our lean management rollout, we're now just starting to test robotic automation processes, sharing shared services and really starting to scale our offerings overall. So yes, we continue to see opportunities to grow margins while still investing back into the business.

Speaker 11

Helpful. Thanks.

Speaker 4

Thank you.

Operator

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

Speaker 5

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

Speaker 5

I'm incredibly proud to be part of this process and I look forward to further accomplishes with all of you along the way. Thank you again for joining us.

Operator

That concludes the Light and Wonder 2024 First Quarter Earnings Conference Call. Thank you for your participation and enjoy the rest of your day.

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Earnings Conference Call
Light & Wonder Q1 2024
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