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Operator: Good morning, everyone, and welcome to the Inspired Entertainment First Quarter 2024 Conference Call. [Operator Instructions]. Please note, today’s event is being recorded. Please refer to the company’s safe harbor statement that appears in the first quarter 2024 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 the 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.

Lorne Weil: Thank you, operator. Good morning, everybody, and thank you for joining our first quarter conference call. Here with me are CEO, Brooks Pierce who will provide prepared remarks in a few moments as well as Marilyn Jentzen and Eric Carrera, who are available for Q&A. As we had more or less previewed a few weeks ago in our year-end conference call, the first quarter was to put it mildly a metaphor for Murphy’s law. To date, we’ve spent well in excess of $10 million in accounting, audit and legal expenses in connection with the accounting restatement, much of which was below the line, but a meaningful proportion impacted EBITDA, and of course, 100% of that impacted cash. We had other significant onetime expenses in the first quarter.

And although our equipment sales backlog is currently at record levels, delivery dates have moved into the second half of the year. Similarly, during the quarter, we continue to spend significantly for recurring revenue growth initiatives, which will have some impact in the second quarter, but which we are confident will continue to grow strongly throughout the year. But before elaborating further on these and other developments, let me preface these remarks by saying that we are anticipating a dramatic improvement in EBITDA in the second quarter. The Interactive business recorded another very strong quarter in Q1, and we see no reason for this growth to decelerate, especially given the opening of important new markets and the steady introduction of new products.

The pullback in our Virtuals business that we have been experiencing has run its course, and we have begun to see a resumption of growth that will be driven further by the new NBA and NFL games as well as new markets. In the Hybrid Dealer area, we’re live with one product, the game show wheel, with a single customer in a single market, and we’re seeing strong, steady growth trajectory, which augurs well for the eventual expansion into a broader customer base in many more markets around the world. Very importantly, from a product point of view, we will be launching the Hybrid Dealer Roulette game in the summer. Roulette is by a significant margin, the largest category in the live dealer sector and one of the very largest in the entire online gaming industry.

And lastly, we’re putting the finishing touches on some Vantage-driven growth initiatives in our gaming business which we believe will add significantly to EBITDA certainly beginning in 2025, again, with some possible positive impact in the fourth quarter of this year. In our last conference call, Brooks referenced our plan to generate significant margin expansion through an operational restructuring that is currently underway and which will generate several points of company-wide margin improvement, again, mostly impacting 2025 and beyond, but without the possibility of some impact yet in Q4 of this year. In a nutshell, our plan is to separate the holiday park business, which is essentially a family entertainment-oriented business, driven largely by amusement equipment, think Dave & Buster’s.

From the other parts of the leisure business from the pub, motorway service, arcade and bingo businesses whose business models are identical to that of our gaming business but addressing different retail environments. So the functional elements of product engineering, manufacturing, platform and content development, server hosting and field service operations overlap almost perfectly providing potentially huge benefits to consolidation. As we complete this consolidation, we can then begin to consider strategic alternatives for the holiday park business. In light of the foregoing, we’re confident, as I said a moment ago that we’re seeing a very significant increase in EBITDA from the first to the second quarter of this year perhaps on the order of, give or take, 50% sequential increase that will give us a strong platform from which to move into the back half of the year.

And with that, I’ll hand it over to Brooks.

Brooks Pierce: Okay. Thank you, Lorne. And I’ll try to expand on several of the topics you covered in your remarks and relay our progress on some of the key initiatives we talked about in our year-end call that ironically only a month or so ago. The combined digital businesses, Interactive and Virtual Sports contributed more than 60% of our EBITDA in the first quarter but are relatively flat compared to prior year. But with the mix changing to more contribution from the Interactive segment but with most of the key growth drivers for Virtual Sports just starting to launch and with plans to accelerate throughout the year. The minimum — the momentum we have been discussing in the Interactive segment continued through the first quarter, with revenue being up 31% year-over-year on a functional currency basis and EBITDA being up 38% on the same basis.

Even with these phenomenal growth rates, the numbers continue to grow with April being our second largest month on record and just last week, the highest revenue week we have ever had. This is a testimony to the strategy and execution of the Interactive team, including our game design teams as well as the commercial teams and is very broad-based across multiple tiers of customers in multiple geographies. Just for an example, we grew our market share in the U.K. in 2023 by 40% and then are at our highest levels ever. We’re rapidly expanding in more geographies, particularly in Latin America, as we’ve discussed in the past and are confident of this part of the business to continue to thrive. We’re also excited about the early momentum for the Hybrid Dealer product in New Jersey and we’ll look to expand to our second state in the second quarter and to launch our Roulette game by the end of second quarter, the beginning of the third quarter and then to deliver the first game to our next customer, Caesars.

As we have discussed over the last few quarters on Virtual Sports, we’ve been impacted by a key customer modifying their player base to focus on players with sustainable value for them, and this has had an impact on our business. There is a silver lining here, however, as we’ve seen the stabilization of the Virtuals business at these levels for the last few quarters and saw the remainder of our online Virtuals business grew 27% year-over-year. We just went live today, actually yesterday and OPAP with our NBA licensed archived footage product with strong marketing support, and we look forward to its success as OPAP has proven to be a very strong retailer with Virtuals growth in their retail footprint growing more than 20% last year. We continue to roll out our latest NFL game to more customers, and we’re seeing growth there.

But I just saw the first few clips from our latest motion capture football shoot, and it’s honestly amazing how much this technology has improved over the last few years. We did full motion capture shoots for both football and hockey and both products will be live later this year, and they’ll set the standard from a visual perspective in the Virtual Sports business. And as I said, we’re confident this will drive player engagement and revenue and EBITDA growth for Inspired and our operator customers. Gaming segment headwinds are primarily due to a couple of key items. First is the loss of a service contract for SSBTs that we were providing to a customer that has decided to bring that service in-house. Second factor is due to a delayed rollout of our Vantage cabinet with a key customer who’s not reaping the benefits yet of the double-digit growth we are seeing with our other customers in the sector.

We’re hopeful that this will be mitigated by year-end and will be a significant EBITDA contributor starting in Q4 this year, but fully realized in 2025. We announced the sale of 720 Valor terminals to WCLC that we will deliver by the end of the year, which will be a big driver of the improvement in gaming performance by year-end, and we are seeing improved performance and good take-up on our game subscriptions to our Illinois customers. Lastly, our backlog of equipment sales in the AGC segment in the U.K. is robust and will help drive improvement in Q2 and throughout the rest of the year. Q1 is the seasonally lowest quarter for the holiday park segment, and we are gearing up to growing that part of the leisure business in Q2 and peaking by Q3.

Pubs business continues to perform well with Vantage cabinet. And as most of our revenue as part of leisure is in weekly rentals. We are aggressively installing Vantage cabinets in Q2 to reach our targeted installed base as we move into the second half of the year. Our MSA business, our motorway services has been challenged by extensive road works in the U.K., impacting footfall in that part of the business, but we hope to see that improve also by the second half of the year. And finally, as Lorne mentioned, we’re laser-focused on our cost reduction plan to reach our target of 40% EBITDA margins, and a number of these plans are being implemented right now but the benefit of those is not expected to contribute until later in the year and will be offset to some degree by the cost to implement these changes, but we are confident that these necessary steps will be actioned and contribute to improved margins and cash flow in the second half of the year.

And with that, I’ll hand it back over to Lorne for Q&A.

Lorne Weil: Thanks, Brooks. That was an excellent summary. Operator, if you can open the program now to Q&A, please.

Operator: [Operator Instructions]. And our first question comes from the line of Barry Jonas from Truist Securities. Please go ahead.

Barry Jonas: Hi, guys. Thank you for taking my questions. I wanted to start on the Hybrid Dealer. Is it possible maybe to give any more color on early performance. And I’m also wondering if you’ve seen or been communicated, any comparisons you can share relative to the live dealer product. Thank you.

Brooks Pierce: Thank you, Barry. Yes. So as Lorne mentioned, and I think I mentioned in our remarks, it is still relatively early days. It’s one product in one market in New Jersey. But what we’ve seen is a pretty steady growth with some spikes of some big plays where we have some days where we have some very big players engaged. And that’s really what we’re looking for is the number of players and the stickiness of the product. But as Lorne also mentioned and you would know from obviously, following the industry like you do, Roulette is probably a much bigger driver of the game performance and so I think we’ll hold off on talking about any comps until we have a little bit more data, both in terms of having more than one market in New Jersey. Michigan is hopefully the market that will go next and then obviously, adding the Roulette game. So as we talk in our next call, I guess, in August, maybe we can give some more on that point.

Barry Jonas: Okay. Great. We’ll definitely follow up then. And then, Lorne, do you really appreciate the comments on sort of the sequential increase you expect Q2 and Q1. But just curious, last quarter, you talked about being comfortable with full year consensus. Do you still feel the same way at this point?

Lorne Weil: Let me answer that in a slightly different way, and then you can draw your reference from it. So we’re pretty comfortable that, as I said a second ago, we’ll see a 50% increase conceivably more from the first quarter to the second quarter. We know from experience that the third quarter is typically the seasonally peak quarter. So there’s no reason to think that the third quarter won’t be better than the second quarter. Generally, the fourth quarter is not that strong, but as I mentioned, as Brooks mentioned, we have a tremendous and growing backlog of equipment sales that will occur largely in the fourth quarter. So I think if you think about it in those terms and you put all those pieces together, I think you can get to where we’re still pretty comfortable with 1 million or 2 million up or down from where the consensus is.

Barry Jonas: Great. All right. Thank you so much. Appreciate it.

Operator: Hi, good morning, guys. Our next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl: Want to start on Virtual Sports. So EBITDA up slightly sequentially, revenue down slightly sequentially. I guess any structural change to the longer term were kind of historical margins you’ve seen from that segment? And then can you talk through any trends you’ve seen thus far in Q2?

Brooks Pierce: Yes. So Ryan, as you know, we’re kind of in the very early days, in fact, with the NBA day two of a product that we think is going to have very wide appeal across the business, not just in North America but throughout the world. So the drivers that we see for the business going forward is, obviously, the NBA and the NFL. We’ll have the new hockey game coming out as well in the fall and then some new geographies. Brazil obviously is lining up to hopefully happen this year. So we’re expecting to see growth return in the Virtual Sports business. In terms of the second quarter thus far, with whatever we are six weeks, five weeks into the quarter, it’s pretty steady state. Last week happened to be a very good week. But we’ll kind of report on that when we can. But we’re not seeing anything that’s changed dramatically so far in the second quarter.

Ryan Sigdahl: And then just a follow-up kind of as you think about other markets you mentioned Brazil, but we’ve seen recent launches with an operator in Spain with ComeOn Group in Scandinavia. But can you talk through kind of maybe not as talked about, but various markets around the world and the potential for Virtual Sports there.

Brooks Pierce: Yes. I mean I think as you — again, as you would know, the predominant product in Virtual Sports is soccer or football depending on where you’re speaking. And particularly in Latin America, with Brazil, obviously, because of the size of the population and because of the fact that they’re going to a regulated market, and is a soccer crazy market. That’s the one that we think has the most hope. But there’s no doubt the Perus, the Columbias of the world where you see iGaming expansion in some of these markets, Virtual Sports should come along as well. So we’re kind of bullish on all of that. And clearly, North America, we still have to — I think I had mentioned it on the call last time. This is the year for us to kind of put up or shut up in North America.

And so we’re seeing some early data coming out of Ontario with a big customer that’s helping us feel confident that as we get to more and more customers in North America that this will appeal to players.

Ryan Sigdahl: Thanks. Good luck, guys.

Brooks Pierce: Thanks, Ryan.

Operator: Our next question comes from the line of Jordan Bender from Citizens JMP. Please go ahead.

Jordan Bender: Good morning, everyone. I want to talk about the consolidation that we’re seeing here in the U.S. in the slot supplier market. typically, that could bring some disruption when we do go through consolidation cycles like this. Does this bring opportunity for you guys to maybe expand or gain some market share here in the U.S. Thank you.

Brooks Pierce: Yes. I mean, I think certainly — I mean, we’re not in some of the space where the disruption is happening. So we’re not in Class II or Class III or HHR but that’s not to say that we couldn’t be because we certainly have the skill set and the technology to be able to do that. I guess the way I would look at it Jordan, is the validation that we got from WCLC in that two years ago, they took a leap of faith going with us as a new supplier and then subsequently two years later, once again gave us 100% of their capital, which to me is an affirmation that our product is working in the VLT markets. So that’s where our focus is, all the regulated G2S, VLT markets. But do we think that the content that we have would resonate in those other markets? Sure. No doubt.

Jordan Bender: Thank you. Great. And then on the follow-up, your margin goal of 40%. Now that those processes are kind of underway, can you just talk about how you get there between — is this more of a revenue growth mix are on the line? Or is it more just kind of through some of your cost controls?

Brooks Pierce: Yes, I mean, I think it’s both. I think it’s — there’s some actions that we have to take and we probably shouldn’t comment on at this point. But we think that there’s ways to increase the efficiency and improve kind of as Lorne alluded in his remarks, is there’s a very big functional overlap. And so that’s something that we’ll obviously try and accelerate and take the benefit of that. It’s come out in the press in the U.K. publicly that we’re going to fully outsource manufacturing so that’s yet another improvement that we’ll see going forward. So a number of cost initiatives. And then on the revenue driver side, it is — as you’ll know, we obviously talk about the digital businesses a lot because they’re the fastest growing, highest margin part of the business.

And as that continues to expand, it’s just going to expand our margins. But we do, as I think Lorne mentioned in his remarks, on the gaming side, we have a couple of initiatives that we think will both increase and drive the revenue, but also at a higher margin. So you take the totality of all of those things, and that’s why we’re comfortable in targeting these 40% margins. But as these things always do, they just take a little bit of time.

Jordan Bender: Great. Thank you.

Brooks Pierce: You’re welcome.

Operator: Our next question comes from the line of David Bain from B. Riley Securities. Please go ahead.

David Bain: Great. Thank you. Good morning, Lorne. Good morning, Brooks. I was hoping we can go back to what you were just discussing, Brooks. Obviously, you discussed some changes in leisure and potentially beyond that with — you seem to indicate that the holiday park segment of that was less synergistic than the rest. And I guess I’m trying to get an idea of what is revenue and EBITDA from that particular segment within leisure.

Brooks Pierce: I have to look at our accounting experts. I don’t know that we break that out.

Eric Carrera: We break that revenue in our — we break out the revenue from holiday parks in our KPIs, and that’s probably the most level we’re willing to sort of be concerned at this stage.

David Bain: But can I assume it’s lower margin? And obviously, it’s very seasonal, correct?

Lorne Weil: Much lower margin.

David Bain: Okay. Thank you. That’s helpful. And then I guess back to the M&A, what Jordan asked somewhat about, with regard to the announcement yesterday that I’m sure you’ve digested by now. Any kind of new thoughts around M&A? And are we seeing different private M&A multiples than we’re seeing in the public?

Lorne Weil: Well, I think the AGS announcement, which was — I think it was a 40% premium over the recent stock price and the multiple was at least, I think, a turn and a half or two turns higher than where they have been. So that’s at least one data point. There are other instances, the most significant was the acquisition of — which I think is probably finally about to close. Yes, it has closed of Aristocrat buying Neo and that was for 15x EBITDA. Now the — which is a significantly different multiple, obviously, than what AGS is getting bought for, but the difference there is that Neo is essentially a 100% digital business. And I think AGS is a terrific company, as you know, but I think they’re probably more like 90% retail equipment business.

So that would account for the difference in multiples between those two. But yes, I mean, I think generally particularly — I mean, there hasn’t been that much in the retail business like the AGS deal, but there — over the last couple of years, there have been several acquisitions or M&A in the digital area like the Neo and those multiples have tended to be generally double what those companies were when they were independent companies. So I think this is sort of the general state of affairs. Just for what it’s worth, I think the — my own view is the acquisition or the going private of AGS is very clever, and I think the buyer is going to have a very, very successful investment.

David Bain: Okay, very good. Thank you, guys.

Operator: [Operator Instructions]. And our next question comes from the line of Chad Beynon from Macquarie. Please go ahead.

Chad Beynon: Good morning. Thanks for taking my question. On the Interactive business, you talked about some nice market share gains in one of the biggest markets in the world, the UK&I. Are you able to tell us kind of where your market share stands or maybe just kind of talk about opportunities to grow that even more in the U.K? And then secondly, I know you talked about this last month. Any change in terms of how you’re seeing the white paper implementations in Interactive. I know you talked about it in Virtuals but any change in Interactive? Thanks.

Brooks Pierce: Yes. Well, since maybe I’ll answer this your question in kind of two parts. Yes, we — it’s kind of the first time we’ve really talked about our market share in the U.K. because it’s kind of public information, we can track that. So the fact that we’re at our highest levels ever and have grown pretty substantially over the last few years, but still we’re roughly 7%. So there’s, again, continued headroom for us to grow I think interestingly, there’s not as much public data in North America, but we think our market share in North America is somewhere between 2% and 3%. So for us, being able to consistently provide good games on time to increase our market share in North America is a huge opportunity. And as you can imagine, the increased market share is almost kind of 100% margin falling to the bottom line.

So clearly, we’re focused on that market as well, and we’ve talked in the past about having a dedicated studio to the North American business, which we’ll comment on as we develop. So even though the business is growing at kind of consistently 30% year-over-year, we still think we have plenty of headroom just because we have such a small market share. In terms of the white paper, probably the single biggest thing in the white paper is the allotment of B3 machines that’s still yet to be determined. But if they increase the number of B3 machines, we would see that as a very big opportunity to add to our equipment backlog because we think there’ll be some increased terminal deployments in the U.K. But the rest of it is kind of been baked in already into the operating model.

So I don’t think that there’s much that other than that, that we see in the white paper that would have any real impact.

Chad Beynon: Okay. Perfect. Thank you. And then on the accounting items that you talked about at the — outside of the call, should we expect any more in the second quarter and I’m sorry, Lorne, I believe you quantified in terms of the impact for Q1. Could you hit on that again, please?

Lorne Weil: I think — yes, Q1, it was about $5 million. I don’t actually think I did comment on. I said it’s been $10 million since the whole episode.

Brooks Pierce: Said a bunch was below the line, but some…

Lorne Weil: $5 million is what we spent in the first quarter.

Chad Beynon: Okay. And anything to expect in Q2 or Q3? Or is this behind us?

Marilyn Jentzen: I think that we’ll have some additional charges, but much less than $5 million as we continue some of the remediation efforts around our material weaknesses, but we would expect those to be much less and then additional legal costs, but that’s it.

Chad Beynon: Okay. Thank you very much.

Operator: There are no more questions at this time. I will now turn the conference back over to Lorne Weil for closing remarks.

Lorne Weil: Thanks, operator. Again, thanks, everyone, for joining. I think the first quarter clearly is not indicative of where the company is right now and where we see it progressing through the balance of the year. I think it’s just one of those quarters that inevitably happens. But the second and third quarters and the quarters beyond will be dramatically improved from the first quarter. And I think by the time we get to the end of the year, we’re going to be very pleased with where we are. So thanks again for joining, and we’ll speak to you again in three months.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.