Aristocrat Leisure Limited (ALL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aristocrat Half Year 2023 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Trevor Croker, Chief Executive Officer and Managing Director. Please go ahead.

Good morning, and welcome to Aristocrat's financial results presentation for the half year to 31 March 2023. My name is Trevor Croker, Chief Executive Officer and Managing Director of Aristocrat. I'd like to begin today by acknowledging the Wallumedegal clan of the Eora people, traditional owners of the land on which we meet here in Sydney today, and I pay my respects to Elders past, present and emerging. It is a pleasure to present Aristocrat's half year results today. With me in Sydney are Sally Denby, our Chief Financial Officer; and Mitchell Bowen, CEO of Anaxi and Chief Transformation Officer. Hector Fernandez, CEO of Aristocrat Gaming; and Mike Lang, CEO of Pixel United, have also joined us on the line. We hope you all had the chance to listen to our market call on Monday announcing the proposed acquisition of NeoGames. While we are very excited about this transformational acquisition, today, we are here to discuss our half-year results, although we will be happy to take further questions on NeoGames during Q&A. Before we begin, please note the usual disclaimer statement at the back of the presentation deck. Today, I will step through highlights of the results and provide an update on strategy and our ESG priorities. Sally will then discuss our group financial results and balance sheet, after which I'll run through the operational performance and outlook. Turning now to Slide 2. I'm pleased to share that Aristocrat delivered a quality result over the period, demonstrating the ongoing resilience, competitiveness and diversification of our portfolio. We have delivered a strong portfolio result even as we navigated challenging market conditions and continued to invest fully behind our successful growth strategy. Our teams faced into considerable economic and political volatility over the half, including the continuation of the conflict in Ukraine, where the support of our people and their families in the region remains our utmost importance to us all. The Pixel United team managed this challenge with empathy and effectiveness, and we'll continue to do so as the conflict unfolds. Turning to revenue. We reported 12% revenue growth at group level compared to the prior corresponding period, or PCP, driven by a continued strong performance of the Aristocrat Gaming Americas business, partly offset by more challenging mobile game market conditions for Pixel United. While EBITDA margins were lower than PCP, they were around 2 percentage points higher than the second half of fiscal year 2022, as supply chain pressures in our gaming business that we previously discussed appeared to be easing. Pixel United's margins were impacted by the softer operating environment. The group's NPATA result of around $660 million represents a profit improvement of 14% in reported terms and 5% in constant currency compared to the PCP. Our strong free cash flow generation was applied to fund Aristocrat's growth plans, while surplus cash has been appropriately returned to shareholders, including through dividends and on-market share buybacks in line with the group's capital allocation framework. We also continue to monitor the macroeconomic environment and consumer sentiment closely and continue to believe that our diversified portfolio provides resilience through economic cycles. In terms of outlook, Aristocrat's guidance to deliver NPATA growth over the full year to 30 September 2023 remains unchanged, assuming no material change in economic and industry conditions. I'll return to provide more detail on our outlook expectations at the end of this presentation. Turning to Slide 4. The benefit of our investments to grow and diversify Aristocrat's revenue base was particularly evident in our ability to deliver solid revenue growth and stable EBITDA in constant currency at group level over the half. Strength in gaming more than offset continued industry-wide moderation in mobile game demand at Pixel United, again, pointing to the fundamental strength of our diverse operations. We continue to invest to grow in attractive adjacencies and verticals as we build further resilience in our operating portfolio, including through online RMG, where the proposed acquisition of NeoGames effectively completes our build and buy strategy. Aristocrat consistently invests in talent, technology and innovation. This once again delivered above-industry performance in key segments and drove market share gains across both gaming and Pixel United. Some portfolio highlights for each business are referenced on the right-hand side of the slide, and you'll note a number of other references to our leading and improving market share positions throughout the presentation. We also took significant steps forward in our ambitious ESG commitments, which I'll return to shortly. These efforts align with our strategy and commitment to sustain success over the long term, whilst we continue to focus on actively executing our capital management framework. Sally will share more on this shortly. Turning to Slide 5. Aristocrat's approach to sustainability is anchored in our most material ESG priorities across the pillars of business operations, product responsibility, people and community. It aims to achieve our vision of being a vibrant business operating within sustainable industries that is able to deliver benefits to our shareholders and other stakeholders over the long term. We continue to make meaningful strides forward against our priorities over the reporting period. This included significant progress towards setting and communicating a rigorous group-wide science-based emissions reduction target by the end of calendar 2023, in line with our commitment. Responsible game play remains Aristocrat's highest sustainability priority. It is increasingly part of the DNA of our organization and we regard it as vital to delivery of our group growth strategy. We fully recognize the reality of excessive gambling and gameplay, including the terrible impact of addiction and associated harms experienced by some individuals and their families. Our response is an approach that is focused on aligning core business systems, processes, policies and actions to match our commitments in every one of our businesses. A good example is our Australian first trial of cashless EGM technology, which is running with the support of the New South Wales government and a major customer. It was expanded during the period to include around 140 EGMs. Finally, we also published our annual modern slavery statement, providing more detail on the comprehensive steps we are taking to recognize, assess and minimize these risks across our supply chains. In summary, Aristocrat is proud of the progress we are making in our sustainability agenda, whilst recognizing that we have much left to do. I'll now hand over to Sally, who will take us through the summary of the group numbers and provide an update on capital and our balance sheet.

Thank you, Trevor, and good morning, everyone. Turning to Slide 7, our group results summary. Over the 6 months to 31st of March 2023, Aristocrat delivered NPATA of almost $660 million. This represents an increase of 14% in reported terms and 5% in constant currency compared to the PCP. On a fully diluted EPS basis, growth was also strong, increasing 17% in reported currency. Revenue increased 12% to almost $3.1 billion. On a constant currency basis, revenue was 5% higher than PCP, reflecting exceptional performance in North American gaming operations and global outright sales. Pixel United demonstrated resilience in a challenging environment against the backdrop of an industry-wide moderation in mobile game demand and the conflict in Ukraine. With productivity in Ukraine recovering, the drag from the exit of Russia behind it and softer comparative base numbers, we continue to expect to see improvement in Pixel United's performance over the second half. EBITDA was 6% higher than the PCP and down 2% in constant currency. Operating cash flow of over $610 million was comfortably above the PCP. This reflected strong underlying business performance and higher interest income, partly offset by other increases in working capital, principally due to timing of receivables and higher inventory. We continue to return excess cash to shareholders with $338 million returned through dividends and on-market share buybacks in the period. The directors have authorized a fully franked half-year dividend of $0.30 per share in respect of the period ended 31st of March 2023. I'll now move to Slide 8. The slide provides a snapshot of the key drivers of NPATA over the reporting period compared with the PCP. As you will observe, the profit increase from Aristocrat Gaming driven by the growth in the premium cost gaming operations installed base and outright sales in the Americas was roughly equivalent to the decrease in Pixel United's post-tax earnings, reflecting softer industry demand as previously referenced. Trevor will share more details on these operations shortly. There are some nonoperational features that I would also like to highlight. NPATA growth benefited from higher interest income arising from the rapid increase in interest rates. This is evident in corporate costs in the chart. Our strong investments in talent and technology increased our D&D expenses from 11.4% to 12.1% of revenue as we built out the Anaxi business to support market entry commitments. This increased D&D expense represents an additional $30 million NPATA investment in future growth. Finally, while our NPATA grew at mid-single digits over the period in constant currency, foreign exchange translation also positively impacted the results. Turning now to cash flows on Slide 9. I wanted to highlight the increase in net working capital, which has been a feature in recent halves. To ensure customer order fulfillment and support strong growth at Aristocrat Gaming, we've maintained inventory at higher levels. This was a proactive decision that has been recognized by our customers. Aristocrat returned $166 million to shareholders in the form of share buybacks during the half. At the period end, Aristocrat completed 48% of our $1 billion on-market share buyback program, which earlier this week we increased to $1.5 billion. Turning now to our capital investment priorities on Slide 10. Aristocrat continues to focus capital allocation on supporting our long-term growth strategy and maximizing shareholder returns. In particular, the business drives organic growth through consistently strong and disciplined D&D spend, UA and CapEx investments, while also pursuing strategic M&A opportunities to accelerate progress in line with our rigorous criteria. Over the reporting period, Aristocrat invested $372 million in D&D to further strengthen our product portfolios and support our entry into online RMG. This is tracking slightly above the upper end of our 11% to 12% target range and is in line with our modeling input. You will observe that Anaxi invested $42 million in D&D across online RMG and CXS. This is a new data point provided with the result in the D&D slide in the appendix. Other startup costs for Anaxi were included in the gaming results. We also invested USD 240 million in UA to drive our mobile portfolio performance, representing 27% of Pixel United revenue, in line with our guidance. The strong net cash position of $440 million on our balance sheet at the end of the period is comparable to the previous half. Capital management remains a key focus as we manage our balance sheet through cycles of investment in inorganic growth. We are targeting a leverage ratio representing net debt to EBITDA of 1x to 2x over the medium term, with the flexibility to move outside this range for strategically attractive acquisitions in line with our historical approach. The proposed acquisition of NeoGames is expected to raise our leverage ratio to 0.7x on a pro forma basis. This still provides us flexibility to return cash to shareholders through dividends and on-market share buybacks as demonstrated by the announced increase in our buyback program and to consider further strategic M&A where appropriate. This completes the overview of group results. I will now hand back to Trevor, who will step through the operational performance.

Thank you, Sally. Turning to the Aristocrat Gaming business on Slide 12. Aristocrat Gaming revenue and profits grew 23% and 17%, respectively, in reported terms, reflecting continued penetration of our high-performing games and cabinets and another strong performance in North America. In the Americas segment, revenue increased 17% and profits by 12%. The standout performance was a significant lift in North America unit sales, increasing 27% compared to the PCP to a record level that is now around 50% higher than the pre-COVID unit sales. Outright sales, overall revenue growth of 46% also benefited from a 21% lift in ASP to over USD 21,000. This performance was driven by growth in customer capital commitments and penetration of new hardware, along with successful growth in priority adjacencies such as historical horse racing and New York Lottery. Gaming operations revenue increased 7%, driven by a 9% increase in our installed base over the prior period, with particular strength in Class 3 premium offset by a slightly lower average fee per day and mix changes within the portfolio. The gaming operations footprint grew to over 61,000 units with continued penetration of leading hardware configurations and high-performing game titles driving this momentum. Aristocrat Gaming continued to deliver strong game performance across the portfolio in North America running at 1.4x for average during the period and exceeding all major competitors. Margins contracted 2.6 percentage points compared to the PCP to 55.3%, reflecting product mix given strong growth in lower-margin outright sales and also higher input costs driven by previously flagged supply chain challenges in 2022. I'm pleased to point out that the merger reported for the period was higher than the second half of fiscal year 2022 by 1 percentage point, reflecting some moderation of supply chain pressures experienced last year. We expect input cost pressures to continue to ease as the year progresses and as we work through high-cost inventory positions. In ANZ, revenue was relatively flat in constant currency compared to PCP, while overall profit decreased by 16%. Similar to the experience in North America, ANZ margins recovered by close to 7 percentage points compared to the second half of fiscal '22, reflecting easing cost pressures. Although not shown in this slide, we're also encouraged by the recovery of our International Class III operations, which reported over 30% increase in revenues on PCP in constant currency. In summary, the global gaming business delivered another high-quality performance driven by exceptional cabinet and game portfolios and effective commercial execution, particularly in our North American operations. Moving now to Pixel United on Slide 13. Pixel United delivered a resilient performance despite a challenging environment and continued to gain market share in the half. Revenue declined by 7% and profits were 16% lower as strength in social casino was more than offset by softness in RPG strategy and casual games. Margins declined 3.1 percentage points, reflecting negative operating leverage, driven by lower overall bookings, our exit from the high-margin Russian market, and a reduction in bookings from some higher-margin legacy products, along with costs associated with the conflict in Ukraine. This was partially offset by effective and dynamic UA allocation and an increased contribution from Plarium Play, which now accounts for around 31% of Plarium revenues, up from 27% in the second half of 2022. Continued investment in Live Ops, features and new content, combined with effective player engagement, which reflected in share gains in the key social casino genre, with the business maintaining its position as a top 5 mobile publisher in Tier 1 Western markets. Pixel United retained its #1 global position in social slots. Social casino bookings were relatively flat against the weaker market, driven primarily by the strong growth of Lightning Link and the ongoing resilient performance of Jackpot Magic Slots. RPG strategy and action bookings declined 11%, reflecting our exit from Russia and the decline in revenues from RAID and Vikings. We're encouraged to see that revenues from RAID were higher in the reporting period compared to the second half of last year. Casual games experienced a decrease of 22% in bookings, reflecting the maturity of our casual portfolio, a focus on effective UA allocation and moderating demand in the genre. Pixel United has continued to execute on its longer-term growth strategy with innovative diversification of marketing across platforms and channels in response to the evolving mobile game market structure and escalating CPIs. Some recent initiatives include partnerships with Brazilian footballer, Neymar; and WWE wrestler, Ronda Rousey; and the recently announced 10-part animated series, RAID: Call of the Arbiter, which will shortly Premier on YouTube. Investments were also made to further bolster core game development, operational and leadership capabilities, and to broaden our presence in key talent markets globally. Pixel United continued to focus on long-term value and maximizing portfolio profitability. As we've shared previously, Pixel United aims to have 10 to 15 games qualified to enter active development at any time and to grow this pipeline over time. 3 to 5 of these titles could be launched over a 2-year period with launch timing dynamic and subject to a range of variables to maximize chances of success. The worldwide launch of Merge Gardens in October '22 was a good example of this disciplined approach. Turning now to Slide 14, which provides some context on Pixel United's performance against the global market. We shared this slide in our fiscal '22 presentation last year, and we've added performance over the first 6 months of the current year. It highlights an extended period of market share gains over the 4 years to 2022, with Pixel United delivering a CAGR of 16% compared to the market CAGR of 12%. These market share gains extended into the first half of 2023. Looking at the half year numbers, there are 2 important features to highlight. Firstly, the global mobile games market declined 10% on the same period last year compared to an approximate 7% decline for Pixel United. This reduction partly reflects the disruption stemming from the conflict in Ukraine towards the end of first half '22, which occurred against the backdrop of moderating demand. The slowdown was evident in a number of soft monthly performances in the second half of fiscal '22. Secondly, the global market appears to have now stabilized, evidenced in the market only declining 1% compared to the previous 6-month period. Encouragingly, Pixel United grew bookings by 1% over the same period. This reflects some stabilization as we start cycling over lower comparative numbers. I would now like to say a few words about our online RMG division, Anaxi, and the progress we've made since establishing it in October last year. Moving to Slide 15. The half was a busy period for Anaxi and we're really pleased with its progress on many fronts. We delivered our market entry commitments, establishing sound foundations from which we will now grow and scale over time. As previously shared, we signed content agreements with BetMGM, Caesars Sportsbook & Casino and Penn Entertainment. And most recently, we added [ Florida ] to the list of partners, enabling it to offer leading content across FanDuel's online RMG platform in 4 states. Our games are live with BetMGM and Penn in New Jersey, and we have exciting plans to add more games in due course as we prove our performance and refine our offer. Early industry data on a small sample is highly encouraging and validate our hypothesis that our market-leading land-based content will resonate well online. We've now signed content agreements with partners representing 55% of the iGaming market in the U.S. We anticipate signing additional agreements over the year. We are comfortably on course to exceed our target of penetrating at least 70% of regulated jurisdictions across North America over the next 5 years. We also closed on our acquisition of Roxor Gaming in January, and the integration continues to progress well. We expect Roxor Gaming's highly scalable and feature-rich remote game server and content publishing technology to accelerate our Anaxi strategy to grow in the iGaming market. Roxor is currently live in the U.K., New Jersey, and was recently launched in Ontario. Additionally, we're proud of Anaxi's first of its kind mobile on-premise solution for tribal gaming operators, which allows patrons to connect and play Aristocrat Class II gaming content via their mobile devices anywhere on trust land. And finally, while we made significant strides in building our RMG capabilities and business over the half, we are very excited about the proposed acquisition of NeoGames. We believe this will truly be transformational for Aristocrat, laying the foundation to fulfill our ambition to be a global leader in online RMG. The combination of Aristocrat's market-leading content and deep customer relationships across our gaming and digital businesses with NeoGames' technology and platforms will enable us to accelerate our content distribution globally, position us as the technology partner of choice with online RMG customers, and ultimately create an additional sustainable growth engine for the group. In summary, we remain steadfast in our view that online RMG is a logical and complementary growth and diversification opportunity for the group to leverage our leading land-based content across a new and growing distribution channel. So while it remains early days, we're excited about our growth prospects in online RMG. Moving now to outlook on Slide 17. Aristocrat's guidance to deliver NPATA growth over the full year to 30 September 2023 remains unchanged, assuming no material change in economic and industry conditions reflecting, continued strong revenue and profit growth from Aristocrat gaming underpinned by market-leading positions and recurring revenue drivers in gaming operations, improved second half of fiscal '23 profit compared to PCP from Pixel United with full year expected to be moderately below the level reported in fiscal '22 in local currency, and further investment in Anaxi to support our online RMG ambitions. Over the medium term, Aristocrat aims to continue to gain market share in all key segments, deliver high-quality profitable growth, continue to invest in D&D to improve competitiveness and breadth of product, invest to diversify our business in line with our strategy, and effectively manage capital to support long-term growth and maximize shareholder returns. In summary, the group has delivered a strong and resilient result for the first half of fiscal '23, demonstrating excellent fundamentals and strong operational momentum despite ongoing challenges and uncertainties. Our performance highlights the incredible resilience and commitment of our team of over 7,500 people around the world. I want to thank each of our employees for their hard work and their dedication to both the company and to each other throughout the period. With that, I'll conclude the formal presentation and hand back to the moderator to open the line for questions. [Operator Instructions]

[Operator Instructions] Your first question comes from Rohan Sundram from MST Financial.

I'll start with Trevor. How would you describe the outlook in land base at the moment? And how would you rate your forward visibility, and in particular, the recovery you're seeing in the rest of world markets at the moment.

Rohan, I've got to extrapolate. It's very hard to hear you. I heard, how would you rate the outlook and forward visibility, but after that, I couldn't hear much more.

No, sorry about that. My bad. I'll start again. How would you rate your forward visibility in land based at the moment? And the rest of world result was very strong. So how would you describe that recovery that you're seeing in rest of world markets.

Yes. Thanks, Rohan. I appreciate the question. I'll make a couple of comments and then just pass to Hector. But I think as we've progressed Aristocrat over the last couple of years, we've been building in better systems and processes around forecasting visibility and tools. And we now come to meetings like this and the way we run the business with a much better visibility of what we're doing, not to diminish the fact that we've got a high percentage of our business in recurring revenue, and so we're very confident from that perspective. On Rest of World, yes, it was great to see Europe reopening and so to see the momentum building there and also some good share taking in the Asian markets with new games and also with particularly markets like the Philippines and Singapore. But with that, I'll just hand over to Hector maybe just give a little bit more context, but we do feel very confident about our visibility of the pipeline.

Thank you, Trevor. Thank you, Rohan. Absolutely, just to reiterate what Trevor said, it was really good to see EMEA start to open back up, start to see strong demand. We participated in ICE again this year and a lot of customers are interested in our product again. The restrictions are mostly lifted across the EMEA region and we are starting to see strong performance there. The other piece that I would share with you that gives us confidence is, we've talked about introducing more of a recurring revenue model into both ANZ and Asia. And we had some pretty good success in this last half in doing so. And so it's really a validation of our strategy relative to producing industry-leading content for our customers that overall drive their venues and their casinos of value. And so we feel pretty confident in the recovery that we've seen in the rest of the world, but also in our ability to introduce a recurring revenue model across ANZ and Asia and EMEA and Latin America.

And I guess on the Americas result was quite a good one, and we're seeing good strength in the game ops business. But how would you describe that half? Because it looked like a very heavy period for Class III installs that we saw. It looks like Class II went backwards and the blended fee per day was down. Should we actually look into that too much given it was such a heavy period of installs in Class III.

I'll make a couple of comments, Rohan, and then get Sally to talk to you around the fee per day. But I think the key thing to focus on here is the size of the installed base and then also the fact that we've grown that installed base by 9 percentage points over the period, which is market-leading install growth when you look at the size of the market. So I think it's important to think of it from that context. And then Sally might make some comments around the fee per day just from a comparison point of view.

So the underlying fee per day remained solid. There are many inputs into this, including accounting adjustments, which drive the movements in the period. We don't typically talk to these, but things like Jackpot liability provisions move over the course of the year and, therefore, have an impact on the fee per day. But again, we're comfortable with the underlying fee per day. We're in a solid stable position with that.

Your next question comes from Adrian Lemme from Citi.

Just firstly, on the mobile market, it's great to see Pixel outperforming, but from the data we've seen to March, the digital market looks like it's basically flat on pre-COVID levels, whereas pre-COVID it was growing at 20% or so. What factors would you put this down to? And should we expect that the market growth going forward is going to be much lower than history, please?

Yes. Thanks, Adrian. I'll make a couple of comments and then Mike might weigh in. First of all, I think we've got to go back a couple of years and look at what happened with the COVID period, where we saw accelerated growth in the mobile market. We were tracking towards 12% to 14% CAGR pre-COVID. That went up to circa 20-plus. We saw that as a consequence of the stay at home, et cetera. Since then, we've seen it moderating back as people have had more alternatives to their leisure time and time outside of the home. So it has come back and it's now looking like a more moderate growth rate, but I'll hand to Mike on the context of future growth from that perspective.

Thanks for the question. As we look at the market going forward, we believe that we're going through a transition cycle. In many ways, we have accelerated into it because of the significant growth in the industry. And as a result, as what's been seen typically within the video game industry, new innovations, new products, new platforms, new marketing then drive the business forward. And we anticipate that, that will happen, but that you're going to probably see moderate growth in the near term until you see those changes overall. And generally, from our perspective, though, we still remain very bullish on the business. We believe it's about great new product, strong live ops and ability to differentiate your marketing relative to your peers. And we continue to do that. As the market comes back over time, we'll even go back to the level of growth that we've seen in the past.

Can I just ask one follow-up, please. Just on the digital game pipeline. I noted your earlier comments. So besides Merge Gardens, which I believe is a relaunch, are there any other titles you'd call out that we should be really watching over the next 6 to 12 months? And just lastly, just Mech Arena, I think it's a couple of years old or so now. And do you think the bookings are pretty much leveled out? Are you expecting sort of another leg up from here?

Yes. Thanks, Adrian. As you know, the pipeline release is a fluid pipeline release. So we go through soft launches to worldwide launch, and that's based off a very disciplined approach to the return. So scaling DAUs, daily retention, et cetera. We're not going to which games are in the market. We have got Mech Arena out there, and Mike can perhaps talk to where Merge Gardens, Mech Arena are from that perspective.

Yes. I think Merge Gardens is a really instructive example of what we think the future of new game launches are going to look like. It's been a more slow and steady growth rate because we've been able to drive new marketing improvements and brand characteristics in the game itself. So since launching the game back in October, on a weekly revenue basis, we've seen a 360% increase as of today. And we think that's going to continue to scale, but in a much slower kind of growth rate than what maybe in the past was seen where you were trying to drive a big number right out of the gate. It's just not that kind of market today and may never be because of the competitive landscape. In regards to Mech Arena, I think as we look at the Ukraine crisis, in many ways, Mech Arena has probably been more impacted than our other games. We put a lot of focus with our limited resources and the challenges we had there towards RAID. However, over the last 3 months, because of some of the stabilization efforts we've been doing, we've been able to regroup that team, we've made some improvements on product, we've also added advertising to the game, which we think will be a critical element. So I do think the jury is out. I don't have a clear answer to tell you whether that game can scale, but I'd be careful to look at it like a 2-year game just because, again, it did have a setback during the Ukraine crisis, but now we think we can put the right effort to it, especially with our new CEO, Shraga Mor, and to be able to see then whether we can succeed. So I'll have more information on that probably 6 months from now. You'll be able to see it on a monthly basis as you look at the data.

Your next question comes from Matt Ryan from Barrenjoey.

I just had a couple of questions on margins. So the first question just relates to the land-based margins, which we can see sort of picked up on a sequential basis. And I think in your prepared remarks, you've talked about the supply chain issues being something like continuing, but easing. So just hoping if you could give some color on when you expect for those to pass? And I guess, how material they were in the half just gone?

Yes. Thanks, Matt. I'll pass to Sally to give you some context on where we are on margins and her perspective.

So I think, Matt, as we've said, the input costs have begun to moderate versus the second half of last year, specifically around chip, sea freight, and we've also seen that air freight is coming down. We do expect further moderation in the second half. And we're obviously happy with the improvements that we've seen, but it'll obviously continue to be a key area of focus for us. But we will still, in the second half, be slightly nervous from higher inventory costs as we've built out inventory over last year.

And then the other question was just on the digital margins actually. So were there any one-offs to call out in the cost line? That would be the first part of the question. And then the second part of it would just be around that UA spend? I'm just trying to work out, I guess, what you're paying for at the moment. How effective was it? I know that CPIs have gone up a lot. So just sort of trying to work out how you landed at the number that you sort of got to?

Yes. Thanks, Matt. I'll ask Sally to give you an update on that as well, particularly around costs and margins in UA.

Okay. So on the margin, we obviously saw a bigger decline in the half. I wouldn't necessarily label them as one-off costs, but there's a couple of elements that are probably more one-off in nature. We've obviously been hit with the overall bookings decline. And our exit from the Russian market was actually exiting the market that was at a higher margin. And then we've also seen a reduction in bookings in some of our higher-margin legacy products across both the Big Fish and Plarium portfolios. And then obviously, some ongoing costs in association with the conflict in the Ukraine. I think it's fair to say this was partially offset between the dynamic UA allocation and obviously an increased contribution from Plarium player. But the biggest one to call out is the high margin on the Russian market as we have cycled over that now and so you wouldn't see that coming back in the second half. And I'll ask Mike to comment a little bit on the UA and our approach to the UA spend.

Thanks, Sally. As we said before, we have a very analytical and deliberate strategy around UA, where we don't chase revenue that doesn't have a good long-term return for us. And we stayed with that strategy over the first half. Clearly, typically within the business. We will look to spend a bit more in the December, January to then drive more profits in the later part of the half. But again, we've been very disciplined. We've been disciplined in regards to even our new game like Merge Gardens in regards to that. So going to the second half, I anticipate that same approach and strategy as we look at what specific returns we get on a game-by-game basis that we spent. We also just -- as was mentioned earlier, we're very interested in some of the innovative marketing attempts that we're looking to do, things like the new digital series that's launching tomorrow. We think that will have brand benefit as well, and we'll be very much closely watching that for RAID to see what that does overall with CPIs as we drive more and more organic traffic to a particular game.

Your next question comes from Justin Barratt from CLSA.

I might start on the gaming side of the business. So you comment that the outright sales were fueled by some larger customer capital commitments during the half. And obviously, we've seen some really strong commentary out of the North American casinos recently. I was just wondering how your conversations are going with some of your major customers about their continued capital commitments, just given the macroeconomic backdrop and continued increasing pressure on the consumer.

Yes. I'll make a couple of comments, Justin, and hand to Hector on some of the customer sentiment. I think the first part about it is we're continuing to take share in these markets, and that's coming from product innovation and hardware innovation. We'll continue to be able to take share in those marketplaces as well. So it's not just about all boats are rising and we're getting a bit of that. We're actually taking share at the same time. I think the other part to this is that the continued investment behind game content and technology and hardware is what differentiates Aristocrat from other companies. And we've put that in as a core foundation and we talked about continuing to invest at high levels to drive the ongoing growth of the organization and create capacity to then do M&A to accelerate our growth. But Hector can talk a little bit to you about the customers on overall sentiment point of view. This is a diversified business with a diversified portfolio, whether it's in the land-based gaming business, whether it's in the mobile business, and ultimately in the Anaxi business in time is that diversification is one of the portfolio strengths of this organization. But I'll hand to Hector to give you some color on some of the customer conversations.

Thank you, Trevor. Thank you, Justin, for the question. So one of the things that we are very proud about the performance of this half is like Trevor talked about this record number of game sales we had in North America, 13,000 units. But One of the things that really shows the quality of that result is that $21,000 AFP, which is also a new record for the business. In fact, if you look at the performance of the game sales market, it wasn't actually just a handful of customers, it was really across our broad base of customers. If you'd listen to some of the earnings calls from some of our major customers, it remains incredibly positive. And we're not observing any material changes in consumer spending across the U.S. In fact, the AGA actually published their first quarter report yesterday, which is timely for this call. And for the quarter, it was another record quarter in the first quarter, and it was also the eighth consecutive record-breaking quarter with 18 of the 35 gaming markets setting new records. And then March itself, just for the month, was the highest grossing month ever from a GGR perspective. And so when you look at the macroeconomic factors that are happening around the world, as we've kind of talked about gaming being resilient through potential economic downturns, we're definitely seeing that from talking to our customers. And also as we look forward and looking at our sales funnel, it remains robust.

Yes, fantastic. I really appreciate it. And then -- sorry guys, but I just wanted to come back to Pixel United margins a little bit as well. I wanted to ask just specifically more about operating costs. it looked like there was a pretty significant step up in operating costs in this half. I was just wondering if you could expand on the contributors to those increases in operating costs and whether we should sort of expect this level of operating cost to be maintained into the second half and beyond?

Yes. Thanks, Justin. I'll just ask Sally to make a couple of comments, or lead the comments anywhere.

Yes. I think, look, in answering your question, the margin is down over the period. And there are a few things in there. The operating cost base is something that obviously we can control and what we drive. And we're very focused on managing that in the environment that we're currently operating on. But again, those higher-margin products have been the key drivers of what's driven that margin down in the half.

Your next question comes from David Fabris from Macquarie.

Look, with the capital structure, thanks for providing new guidance on target leverage. As for those debt facilities, will you likely move away from the term loans if there's something cheaper out there? And are there options to make early repayments on those facilities as well?

Thanks, David. I appreciate your recognition of the capital structure. I know that it's something that's being debated by shareholders in the market for the last year or so. We tried to put some clear rules and guidelines around it for you. Just reinforcing our #1 investment every year is still D&D and UA to drive the organic business and then to accelerate our growth through M&A by investing in adjacencies and strategic M&A where appropriate, and obviously, we just announced that with Neo this week. And then also returning to shareholders, or surplus cash back to shareholders through dividends and the buyback program, which is now $1.5 billion in total. But I would like to just ask Sally to make some more context on the debt structure to your question.

Thanks, Trevor. Look, David, we remain comfortable with our current debt structure. And we got attractive funding costs when we refinanced last year, and we are unlikely to pay down. We continue to monitor this, obviously, in line with our capital management approach. But at the minute, we're comfortable with the way that our loans are positioned and the funding rates that we got on those.

Got it. No worries. And I just had a question on NeoGames actually. Can we clarify whether key management have made commitments to stay on in the business so there's a risk of turnover? And then just a second question within Neo there. Is there anything stopping you from providing content on commercial terms before this deal closes?

David, I'll make some comments on the people, and Mitchell is here, so you can add in some extra words. We feel very comfortable that the key talent have commitments to come across with a deal at the right time. Obviously, they are an important part of this acquisition, and they've been very engaged with this process and we've found it to be very engaging for them and also for us and that we're very confident, extremely confident they will come with the transaction. So I don't see any challenge from that perspective. On the second question, which was around -- sorry.

Our content.

Our content. So pretty close, our content on to theirs. Obviously, we go through a very sensitive process. At the moment, David, there's a process that needs to occur where NeoGames' shareholders have to vote for the transaction. We obviously feel very confident about that when you have 61% commitment from the shareholders towards that, requiring only 66% or 2/3. But we will continue to work through that process appropriately. And at the right times, we'll be able to have the right level of dialogue, but there is some water to go into the ground, and there's water to go into the bridge on this whole transaction, and we do need to respect that process.

Your next question comes from Andre Fromyhr from UBS.

First question is about the financial impacts of the Anaxi segment in the half just gone, but also what that might look like in the second half. I appreciate you've shared some information around what share of D&D spend could be allocated to Anaxi. But are there other costs associated with setting up that business. And are you starting to recognize the income streams from Roxor and the other initiatives that you've got?

Yes. Thanks, Andre. Just this is a startup business, and we've said that we were going to build this. So we are at the investment stage, where we're investing in critical infrastructure. We're investing in the D&D to make games and technology. But I'll just let Sally add a little bit more context to that. But I do think we need to think of this as a building strategy, and it is going to require some investment to actually generate the revenues longer term.

So from an investment perspective, we provided the D&D's split on Anaxi for the first time in this period and that's really to provide some guidance around how much we are making from a technology and investment around Anaxi. And we have the costs embedded still within the gaming business. And probably from an overall standing perspective and employee base, we've got about 10% of our total overall employee base that is dedicated to Anaxi at this point in time, some of that in CXS, and some of that in RMG. I think the other element of your question was around revenue, Andre. And I think given that our content has only just started to go out to market, you'll probably see revenue start to come through or expect to see revenue come through Anaxi through the RMG segment in the second half, and obviously, the revenue that Roxor brings with it, but we only had one month's worth of that in the numbers following the acquisition that closed at the end of January.