A. Lorne Weil; Executive Chairman of the Board of Directors; Inspired Entertainment Inc
Brooks Pierce; President, Chief Executive Officer; Inspired Entertainment Inc
Patrick Keough; Analyst; Truist Securities
Jordan Bender; Analyst; Citizens JMP Securities LLC
Ryan Sigdahl; Analyst; Craig Hallum Capital Group
Operator
Good morning, everyone, and welcome to the Inspired Entertainment fourth quarter 2024 conference call.
(Operator Instructions) Please note, today’s event is being recorded.
Please refer to the company’s safe harbour statement that appears in the fourth quarter 2024 earnings press release, which is also available in the investor section of the company’s website at www.inceinc.com.
This safe harbour 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 statements 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. Our conciliation is included in the earnings press release. With that completed.
I will now turn the conference call over to Lorne Weil, the company’s Executive Chairman. Mr. Weil, please go ahead.
A. Lorne Weil
Thank you, operator. Good morning, everyone, and thank you for joining our fourth quarter earnings call. First, let me say I’m sorry that due to circumstances beyond our control, the press release.
Went out later than it usually does, and I hope that hasn’t caused too much consternation. With me as usual are Brooks Pierce and Eric Carrera and we welcome today our new CFO James Richardson. James joined at the beginning of the year just as we were knee-deep into the audit process and with this call today, we successfully conclude his baptism by fire.
Adjusted EBITDA for the fourth quarter was $30.9 million, up 22% from last year. The full year adjusted EBITDA of $100.1 million and $99.3 million for ’24 and ’23 respectively. Reflect minor revisions to prior results due to the timing, but not the total amount of revenue recognition. We can discuss this more in Q&A if anybody wants to understand it more clearly.
As a result of these revisions, we intend to file our 10-K by Wednesday this week or by the end of the week at the very latest. Additionally, and perhaps more importantly, as will be disclosed in the 10-K, we recently received a letter from the SEC.
Informing us that our inquiry is now closed and that they would be taking no further action. We are of course very pleased with this outcome. The results for the fourth quarter and full year are in line with expectations, and we feel that all the business areas are in very good shape.
The interactive business continues to be the star of the show with fourth quarter revenue and EBITDA growth of 45% and 105%, respectively. Interactive accounting for approximately 22% of overall company EBITDA after corporate cost allocation in the fourth quarter and given its growth trajectory, we think it will reach well over 25% by the end of the first quarter.
I think it’s maybe not widely understood that in a handful of states that have both I gaming and sports betting. Primarily New Jersey, Pennsylvania, and Michigan. IGaming dwarfs sports betting by a ratio of 4 or 5 to 1 of course we can’t predict the rate at which new states will adopt IGaming legislation.
But my many years in the gaming industry, I’d rather not say how many. Convinced me that as was the case with horse racing, lottery, casino gaming, tribal gaming, and most recently sports betting. The eventual spread of iGaming is inevitable, especially as in the current environment.
Individual states begin finding themselves short of cash. So, the opportunity for us in this business is limitless, and our commitment to product and technology performance is concomitant. The other part of our digital business, virtual sports, continues to perform at an extraordinarily high level of profitability. But at the same time continues to try our patience. During our third quarter call, we predicted that we expected virtual sports revenue to hit an inflection point during the fourth quarter, and this did not happen.
Brooks will delve into all this in more detail in a moment, but given performance so far this quarter, we seem to have indeed passed the inflection point, butchered by a number of deliberate actions we have taken to strengthen the business.
Given modest acceleration in virtual sports together with the aforementioned anticipated growth and interactive. We expect our overall digital business to approach 60% of EBITDA by year end.
At the same time, our retail-oriented businesses continue to perform very well with content creation and distribution being the primary drivers. In Illinois, for example, the only jurisdiction in America so far to adopt a server-based gaming model, our products are performing extremely well and our installed base of razors are generating an excellent recurring stream of blades.
With there being a lot of talk today about recession, I want to mention that our business right now is structured extremely well. To sail through any downturn. Over half our profit, as I mentioned a moment ago, is digital. Over 85% of our revenue is contractually recurring, even though margins are high and our leverage quite comfortable. But let me conclude by touching on a couple of these points.
While one-time equipment sales account for only 10% of our overall business, which speaks very well for our inherent recession resistance. They sometimes fall disproportionately late in the fourth quarter, and 2024 was one of those years. As a result, there was a significant year to year increase in accounts receivable from year end ’23 to year 2024.
And this in turn resulted in our year-end cash being less than anticipated. A snapshot a few weeks later it would have shown a very significant difference. Finally, on the subject of leverage, most of you would know that our current credit facility matures in June 2026 and would therefore become current in 2025.
Consequently, we’ve been working hard with the goal of having a new facility in place prior to June. With the expectation that rates are likely to generally drift downward and perhaps down still more so in the event of a recession.
Our new facility is more likely to be floating rate rather than fix as it is now and to be generally more flexible and with that alternative over the Brooks.
Brooks Pierce
Okay, thank you, Lorne, and they usually do. I’ll try to get some more color to the 4th quarter and year end and what we’re seeing thus far with the first quarter of 2025. Let’s start with our digital business segments interactive, which includes hybrid dealer and virtual sports where we’ve seen consistent growth.
Our interactive segment grew revenue by over 13% quarter over quarter, and we’re seeing the operating leverage within this segment with adjusted EBITDA margins increasing to 65% for the full year from 55% last year.
We’ve seen those trends continue into the first quarter of the year with February actually being the 2nd highest daily average revenue month we’ve ever seen. These revenue and even out trends are broad-based from both a geographic basis and from a customer basis with no specific concentrations in either, but the growth we’re seeing with Tier One customers in particular is very gratifying.
Seeing all of this with very little contribution thus far from the Brazil market launch in January, and we expect that to be a very good market for us. This performance is really a testament to the great work done by the product team in concert with strong account management, and our roadmap for the year looks very strong.
Moving over to hybrid dealer, we’re now live with three customers including Bet MGM, Bet365, and Caesars. We continue to see strong performance from this group across multiple geographies, but we still believe the best is yet to come. We expect to launch our next branded roulette game with Latto Quebec in the second quarter, along with an expected launch of our 4-ball extra bet game.
Both of these are significant in their own right, and we look forward to reporting on their progress in the near future. The pipeline of customers for our hybrid dealer game is robust with a very good mix of both geographies and tier 1 and tier 2 customers.
2024 was a challenging year for our virtual sports businesses we’ve discussed many times and was largely due to a revenue reduction from our largest customer. The rest of our customer base actually showed modest year over year growth in 2024, and as mentioned in our earnings release, we’ve made the decision to consolidate the virtual product and technical function that had previously been separate into the company-wide product and technical group.
This group has largely been responsible for our success in the interactive segment, the development of our hybrid dealer products, the successful launch of our advantage cabinet in the UK, as well as notable growth in our North American VLT footprint.
I’m very excited by the early progress of this combination, and the group has already presented some exciting new innovations in virtual sports. We’ve shared these innovations with our two largest customers, and both are enthusiastic about getting these out to the market. And to their players.
This group has also been instrumental in the development of our first online lottery product for virtual sports in the US market that we’ll be launching with Aristocrat Interactive into the Virginia Lottery at the end of April.
We’ve seen the stabilization of our virtual revenue in the first quarter thus far, and the combination of the new organization, new products, and key new markets like Brazil give us confidence that we can get the virtual sports business back into growth mode.
In our land-based business, our gaming segment had evened out growth of 42% year over year in the fourth quarter, due in part to gaming hardware sales in the period.
We expect the roll out of our vantage cabinet to the William Hill Estate to be completed by the end of the first quarter, and we’re seeing the benefit of that conversion as Vantage cabinet replacements are producing cash box growth in excess of 10% on a like for like basis.
We’re also in the early stages of rolling out new cabinets to our customers in Greece with the introduction of a slant top cabinet, our first iteration of this style in Greece, and we expect to start seeing the benefit of new cabinets in this key geography as we get further in the year.
We also showed a new portrait cabinet at G2E in October, excuse me, for the first time, and have started trials in Illinois and expect this to be successful.
We’re indexing at our highest levels ever in Illinois, and we’ve had most of our customers sign up for our subscription service, which gives a good recurring revenue stream to this market that’s maturing and allows us to keep our content fresh and it’s showing in the performance.
In our leisure segment, we showed a solid 7% revenue growth year over year in Q4, with a larger increase in EBITDA growth due in part to improve margins from cost improvements and some one-time adjustments. We continue to see the performance of our advantage driving increased performance in pubs, and we’re adding this to our customers’ locations significantly as we move through the first half of 2025.
We’ve extended the contracts with our two largest MSA customers, Moto and Welcome Break, and are seeing improved performance there as well. Q4 is seasonally the lowest quarter for our holiday parks business, but we’re gearing up here in the first quarter for the 2025 season.
So in summary, our land-based businesses, including our lottery systems contract in the Dominican Republic, continue to perform well and provide a steady source of recurring. This allows us to continue to drive our digital businesses which represent more than 50% of our combined.
Furthermore, we expect to see the benefit of our reorganization in the virtual sports segment, as well as new milestones for our hybrid deal product as we move further to 2025.
And with that I’ll pass it back to the operator for Q&A.
Operator
(Operator Instructions)
Barry Jonas, Truist Securities.
Patrick Keough
Hey guys, good morning. It’s Patrick Keough on for Barry this morning. To start off on virtual sports, I think we understand the struggles with your largest customer, but could you dive any deeper into the challenges that segment is facing? Thanks.
Brooks Pierce
Yeah, I think it’s, well, if you in looking at the numbers, it really is driven by one customer, but we’re starting to see, I think, as we mentioned, some stabilization with that customer, which actually gives us some great comfort and the rest of the business has shown, modest growth in the same periods.
So and I talked in large part about this reorganization of the product group. And you know we’ve brought it into the into the main fold and we’ve come up with some pretty interesting new innovations really playing on some of the success that we’ve seen in sports betting and same game parlays and things like that.
And we’ve taken that out to show to our two biggest customers, both of which really thought it was a great innovation and want to get it live as soon as possible. So, you know we feel confident that in the margins, I think as Lorne mentioned, the margins are extremely high, over 70%, EBITDA margins. So, we still feel very bullish about the virtual sports business on a going forward basis.
Patrick Keough
Okay, great to hear thank you for that. As my follow up, have there been any updates to how you’re thinking about M&A either from a buy or sell side perspective here, including any thoughts on the strategic review of holiday parks. Thanks again.
A. Lorne Weil
Well, on this strategic review of holiday parks, We’re where we have been, which is that we’re seriously exploring the sale of holiday parks.
We’re cautiously optimistic that we’re going to come to a favourable conclusion, but until something is firm, obviously there’s not much more we can say, but it’s certainly moving in the right direction and we’ve been working on restructuring the rest of the business and anticipation of doing that.
Beyond that, I don’t think we have any intention or any reason to be thinking about divestment because the rest of the businesses are performing extremely well as Brooks talked about a second ago. As far as on a side of M&A. We’re always looking for something that makes sense.
We have an active program doing that our balance sheet is in very good shape in terms of having capacity to do something. We have a fairly rigid set of criteria for anything we might do. Right now, there is nothing. On the horizon, but we continue to look and If something comes along that fits the criteria, then we’ll go ahead with it, but right now again there’s nothing beyond that that I can say.
Patrick Keough
Great, I appreciate it.
Operator
Jordan Bender, Citizens.
Jordan Bender
Morning everyone. I just wonder if we could get an update on where the UK white paper sits today and are there any noticeable impacts we should expect in the market or for your business in 2025?
Brooks Pierce
Yeah, probably there’s one development that’s going to happen and one that we actually hope will happen in terms of the stakes limits. So that’s a fact and that’s going to happen, and we’ve assumed that in all of our budgeting and forecasting and we think it will have a minimal impact. Because we’ll continue to innovate from a game standpoint to deal with that, but we expected that, knew it was coming, and it’s, I think it starts in April.
Probably the part that we’re waiting for is the liberalization of B3 cabinets, so that we could get, there’s a restriction now on the number of B3 cabinets that you can have in the UK, and there’s been a lot of talk about that being. Liberalized a little bit, which would obviously be very good for us in terms of some of our one-time sales in the UK, but that’s still to be determined.
Jordan Bender
Thank you for that. And on the follow up, the cash balance is dipping quarter over quarter, should we still expect if they could give guidance of 1Q cash of $50 to $55 million is that still the right way to think about it?
Brooks Pierce
I would say it’s going to be a little bit lower than that because I think as Lorne talked about there’s been, some delay in the receivables so I think directionally it’s right and we’ll have to see as we as we get a little bit further along, but I’d say it’s probably a little higher than we would expect. It’s probably going to be a little bit lower than that.
Yeah just yeah just that Eric. Oh, we also just at the time I don’t think we. The timing of the cash payments for certain suppliers like for the for the William Hill deployments we actually accelerated that we’re going to get that done by the end of March I think earlier we got it’s going to be early Q2, but we’ll have that done, by the end of this quarter. So there’s been some supplier related payments that just sort of accelerated so.
Jordan Bender
Awesome thanks everyone.
Operator
Ryan Sigdahl, Craig Hallum Capital Group.
Ryan Sigdahl
Hey guys, I want to stay in virtual sports, so given the high single digit growth outside of your top customer there, it implies pretty big declines from that customer, which we know, but I guess what gives you the confidence to say that you’re past that inflection point? I feel like we’ve heard that for several quarters now that the business was plateauing, and it continues to drift lower. So here’s what you’ve seen year-to-date in 2025 and kind of real time.
Brooks Pierce
Yeah, well, I can definitely give some comfort on that since I have seen real-time data in the in the first quarter and, at least halfway through March, it really has kind of levelled out a lot of that is in part probably the only difficulty that we’ve seen.
Is in Brazil, this transition starting January 1st where everybody had to kind of shut their accounts down and bring their accounts back up. So, January was just a little bit soft, but February actually recovered from that. And look, we still happen to believe that on a going forward basis, Brazil and is going to be a very significant market for us, two of our biggest customers, Bet365 and Pettano in Brazil, which represent right now about 40% of the market in Brazil, are seeing, very strong.\
A results and as we start adding, more and more customers, I think we’ve done press releases on our partnership with Camby, our partnerships with Altar, plus some of our individual deals, we expected Brazil by the time it’s all said and done to probably end up being the biggest market we have. So, first quarter, pretty stabilized, but certainly we think there’s a lot of potential for growth in virtual sports still.
Ryan Sigdahl
Helpful, hybrid dealer, you mentioned three customers you’re live with, Caesars, MGM 365. You had a press release from FanDuel, launching a hybrid dealer game back in October, I guess curious where that stands because presumably it’s not live yet.
Brooks Pierce
No, it’s not live yet, and it’s a pretty big bespoke project. Fan’s been great to deal with on this, and we would expect this product not to go out until right before the launch of football season in 2025, so it won’t be before then, but I think it’ll be, frankly with Van’s participation, I think it will be a pretty significant product launch.
Ryan Sigdahl
Great, thanks, guys. Good luck.
Operator
Chad Beynon, Macquarie Group.
Hey guys, good morning. This is Aaron on for Chad. Thanks for taking a question. First one to ask about, given additional bandage machines and other retail opportunities, can you just talk about CapEx needs and what that means for cash flow?
Brooks Pierce
Yeah, well, I think in terms of CapEx, we mentioned the moto and welcome break renewals which will require some CapEx.
We’re in the midst of. Upgrading a number of our pub customers and that will also take CapEx, but I think all of that’s been planned for and budgeted for, so nothing has come out of the woodwork that that’s unexpected. So, I think from a CapEx standpoint, Eric can jump in if he wants to add anything to this, but it’s going to be roughly the same as what we’ve seen in the last couple of years. So, nothing out of the ordinary.
Got you. Okay, that’s helpful. I also want to ask about the lottery business. Can you just talk about where you see the opportunities in 2025 to drive growth or sign new contracts, and how should we be thinking about the benefits from the new cloud-based lottery system? Thank you.
Brooks Pierce
Yeah, thanks. No, that’s a good question. So we are planning to hand over to our customer hopefully by the end of this month it looks like, or maybe just in the beginning of April for their part of it, the customer acceptance testing, so the development is largely done and I think when we get that and when we put it into the DR we think it will be the most advanced lottery system.
Anywhere and Lorne can comment about the potential for, the sale of a system like this around the world. But we look at lottery in in in a couple of different vectors. So, one is obviously the systems business that we just talked about. We’re super excited about this launch of virtual sports with the Virginia Lottery and Aristocrat at the end of April because we think that’s the first time, we think that will be the first time. That it’s an online lottery product in the US and for those that don’t know, Virginia Lottery is a very successful lottery state with doing over a billion in sales.
So we’re super excited about that product and both Virginia Lottery and Aristocrat have been very involved in the delivery of that, and we still believe lastly and On the lottery segment that stance is a natural advancement for using some of our content that’s been successful kind of around the world.
So I’d say the e instant development’s probably a little behind where I would like it to be, but we still think that’s a very viable opportunity. So, Lottery is a very key segment or channel for us that we probably don’t talk about as much as we should, but we do think. That over the next couple quarters we’ll start seeing some pretty significant opportunities in in in the lottery segment.
Great, thank you. Appreciate the color.
Operator
No problem. That concludes our tuning session. I will now turn the call over to Lorne Weil, the company’s executive Chairman, for closing remarks.
A. Lorne Weil
Thank you very much, operator. I don’t really have much to add. I think. I think Brooks gave a very comprehensive overview of where each of the businesses is. I do agree with him that everything we’re seeing seems to suggest that the virtual sports business is it has passed an inflection point. I think the.
The most important point is as far as virtual sports goes is we put a significantly renewed focus on product development and product enhancement. I think for a while because we had A tiger by the tail with interactive. We were throwing everything but the kitchen sink at interactive and you can see by The phenomenal growth in both revenue and profitability that that that that focus and that development.
Has really paid off and I think to be honest for a period of time we We’re probably under underinvesting in product development in virtual sports just because the interactive opportunity was so huge.
But now I think we’re. We’re not diverting resources, we’re adding resources, and I feel cautiously, more than cautiously optimistic that we can duplicate. In virtual sports, what we’ve been seeing with Interactive now that we’ve got to focus on product enhancements, and I think we’ll start to see this in the next few quarters.
Other than that, I don’t really have anything else to say. Everything else is in very good shape, balance sheets in good shape, cash is in good shape, and We look forward to talking to you in a few months.
Operator
Thank you. Ladies and gentlemen, that concludes today’s call. Thank you all for joining and you may now disconnect.
