Inspired Entertainment, Inc. (INSE) Earnings Call Transcript & Summary

Thank you. Good afternoon, everyone, and welcome to the Inspired Entertainment second quarter 2026 conference call. All participant lines have been placed on mute to prevent any background noise. After the speaker's prepared remarks, we will open the call for a question and answer session. Please note that today's event is being recorded. Before we begin, please refer to the company's forward-looking statements that appear in the second quarter 2026 earnings press release and in the accompanying slide presentation, both of which are available in the investor section of the company's website at www.earnings.com. I-N-S-E-I-N-C dot com. These also apply to today's conference call. Management will be making forward-looking statements within the meaning of United States securities laws. These statements are based on management's current expectations and beliefs and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially. from those expressed or implied in such statements. For a discussion on these risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission. During today's call, the company will discuss both GAAP and non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in today's earnings release and slide presentation. which are both available on the website. With that, I would now like to turn the call over to Lorne Wheel, the company's executive chairman. Mr. Wheel, please go ahead.

Thank you, operator. Good afternoon. And thank you for joining our second quarter conference call. I'll begin with some overarching comments, and we'll then hand it over to Brooks, who will discuss the business in the significantly more detail. As you'll hear in a few minutes, there was a lot going on in the first half of the year. And there's even more in the second half. Revenue and EBITDA of $61 million and $27 million, respectively, in the quarter were about where we expected. And EBITDA was a little ahead of consensus. Comparison to the second quarter of 2025 isn't too meaningful because of the exclusion in 2026 of the the divested holiday park revenue and income, which were seasonally strong in 2025, as well as the impact of pub restructuring. At the same time, however, it's instructive to compare the first and second quarters of 2026 to each other to get a sense of sequential momentum. In that case, second quarter revenue and EBITDA were 6% and 14% respectively from the first quarter, despite the impact of the near doubling of the UK Remote gaming duty beginning in April, a subject to which I will return in a moment. As a result of the combined Holly Park sale and pub restructuring, together with the momentum in our continuing digital and retail businesses, our EBITDA margin expanded by 1000 basis points year over year to 45%. In parallel, we have year to date retired 23 million in debt, repurchased over 700,000 shares and reduced our net leverage to three. So four confirms our 2026 EBITDA target range of 112 to 118 million. and guides to free cash flow conversion for the year of 20% plus of EBITDA. For reasons I will explain more fully later on the call, the true operating free cash flow of the business in 2026 has in fact been significantly better than it was in the past. what can be seen from the reported results. And for the year, we expect that on a pro forma basis, it will be in excess of 25% versus the 20% shown on the slide. The impact of the increase in the UK gaming duty, which went into effect on April 1st, something we need to unpack a little more fully in order to fully understand how the rest of the year will unfold. As illustrated in slide 5, worldwide year-over-year growth in interactive revenue and EBITDA in the second quarter were 15% and 13% respectively. A decent but totally anomalous result in that historically interactive EBITDA has consistently grown. grown meaningfully faster than revenue due to operating leverage in the business. The cause of the second quarter anomaly is of course the UK remote gaming duty. On slide five, we illustrate that our UK gross gaming revenue in the second quarter was 40% up year over year. I should emphasize this was our gross gaming revenue, not the gross gaming revenue of the UK market itself. But the near doubling of the tax largely negated this growth, thereby depressing the margin. The compounding effect of the increase in our GGR of 40% with the doubling of the tax rate meant that in absolute terms, our tax impact went up two and a half times from year to year. For the balance of the year, the anomaly will continue to distort year-to-year comparisons, but sequentially the situation will be quite different. In a moment, Brooks will show how in each of the last three years, consecutive second half interactive volume growth was well ahead of first half, with EBITDA growth even faster. Since the increased tax was fully in effect in this year's second quarter, we can anticipate that as we move through the balance of this year, the sequential relationship between EBITDA and revenue will revert to the historic pattern.

showing operating leverage. And with that, I'll hand it over to Brooks. Okay, thanks, Lorne. As usual, I'll provide more detail on our business segment in the second quarter and share an update on the key initiatives we're focused on for the second half of the year. Our Q2 results demonstrate continued progress in transforming the business into a more digital-led, less capital-intensive model, while increasing adjusted EBITDA, expanding EBITDA margins, generating stronger cash flow, and giving us the flexibility to continue deleveraging and repurchasing the shares where appropriate. We discussed these priorities for some time and we are pleased to see the benefits coming through. with EBITDA margin reaching 45% by the end of the second quarter, tracking in line with our full year guidance. Moving over to slide 7, retail solutions performed very well in the quarter, executing against our margin expansion strategy following last year's sale, the holiday parks business and the restructuring of our pub segment. And as a result, the business delivered EBITDA margins before corporate allocation of more than 50% for the first time. Performance was driven by continued cash box growth across our UK retail businesses, including the licensed betting offices, MSAs, pubs, AGCs, and bingo. As previously discussed, William Hill closed just over 200 shops during the quarter, and these closures were largely their lower performing locations. which improved the performance of the remaining William Hill estate. At the same time, we successfully redeployed the removed terminals across our broader estate with further placement opportunities still ahead. In Greece, we delivered year-over-year cash box growth and further expanded our market-leading share, supported by our latest Vantage cabinets and our best-in-class content. The Vantage Flank cabinet has delivered particularly strong gains in Greece, which were reinforced by Allwin's additional order of more than 2,000 replacement machines. We expect to begin delivering those units in the fourth quarter of this year as part of the ongoing refresh of our Greek estate, with 32% of our 9,000 terminals yet to be refreshed. We also installed 125 terminals for AGLC in Alberta this quarter, further strengthening our position in the important Canadian VLT market. A key part of our retail solution strategy is continually refreshing content to keep players engaged. And during the quarter, we sold subscription game packs to both and to more than ninety two percent of our Illinois terminal base, which has driven the best performance in that market. We've seen the date. We're also leveraging our omnichannel strategy by bringing successful online titles into retail and early results are encouraging. Wolf It Up has proven to be a top game in multiple retail markets in the UK and North America, demonstrating our ability to translate online game success into retail performance. Moving over to slide 8, the interactive business continued to perform well with adjusted EBITDA growing approximately 13% year-over-year despite the impact of the UK remote gaming tax, nearly doubling from 21% to 40% beginning on April 1st. Then we continued to gain market share in the UK, which helped offset some of the tax impact we had previously guided to. As Lorne mentioned, UK gross gaming revenue grew 40% year over year in the second quarter, underscoring the strength of our content and the continued demand for our games. On this slide, you'll see the pattern of interactive plays over the last four years and how each year the lines overlay one another in virtually the same way. As you can see, that pattern didn't change in 2026, despite the introduction of the UK tax changes on April 1st. If this historical pattern continues for the remainder of 2026, 26 as it has in prior years. We expect the second half of the year to grow in a similar trajectory, giving us confidence in our second half targets. We've also continued to gain share in North America, led by the performance of our cash bank family games across operator customers. took advantage of the World Cup fever and released several soccer-themed skins on our most popular franchise brands. And these games kept players as engaged as the World Cup did for fans across the globe. In July, we launched on day one of Alberta's newly regulated market with all major operators, and we're very excited about this market. we see further opportunity to leverage content that has already proven successful throughout Alberta through AGLC and also Ontario and expand our presence over time. Hybrid dealers also gaining momentum with turnover increasing 13% and GGR increasing 25% from Q1 to Q2. In Q2, we launched our branded Wolf It Up roulette game with DraftKings and added key UK operators such as Betfred, which contributed to this growth. We're also developing a bespoke BetMGM game based on the Price is Right license for delivery by the end of the year. hybrid dealer may not become as large as we originally anticipated, it certainly represents a focused opportunity within Interactive and we continue to see attractive growth potential as we expand our offerings and add new customers. And finally, we've committed significant resources to expanding our iLottery eInstance capabilities expect to begin delivering games into that vertical next year with plans that further leverage our content creation capabilities in all of these areas. Moving over to slide 9, we continue to invest in our content creation capabilities, including the building out of our newest content studio in Manchester. Be Real Games is generating a lot of buzz. Sorry about that. I couldn't help it. It's expected to launch its first game by year end. As I've said before, the feedback we hear most often from operator customers is that they love our content, they just want more of it. So our new studio is expected to produce one additional game per month with a focus on developing more market-specific content that complements and expands our portfolio of franchise brands. We anticipate moving to slide 10, we anticipate stronger momentum across Interactive in the second half, which is traditionally higher than the first half due to our seasonal holiday game releases, one of our key strengths. The fourth quarter in particular has been our strongest period with last year's revenue increasing by over 17% and adjusted EBITDA increasing 23% compared with the third quarter. And we expect a similar seasonal uplift in 2026. In addition, we have several upfront custom game development payments scheduled for the fourth quarter, which we expect will provide an additional incremental benefit. Moving over to slide 11, a virtual sports segment delivered another quarter of stable results supported by several key initiatives launched late in the quarter that we expect to drive growth in the second half of the year. BetMGM now has a fully integrated sportsbook solution in New Jersey and Ontario and turnover increased 50% from Q1 to Q2 with early July results showing continued growth. We also launched with BetMGM in Alberta and with other key customers there, including Bet365. Overall virtual sports revenue increased 3% sequentially, driven in part by the rollout of our Soccer 4.0 with the BetBuilder feature to key customers, as you can see in the slide. including Alwyn in Greece and Batano across Latin America. During the World Cup period, these customers saw a 6% increase in turnover generated from this product, and we'll continue to roll this product out to additional customers on a worldwide basis. Momentum is also building through the broader distribution of our virtual sports portfolio to sportsbook providers such as Playtech, where we recently just went live with the Malta Lottery. Moving over to Latin America, our partnership with Altanar delivered significant growth with turnover up 55% and GGR up 61% from Q1 to Q2 while adding several new customers and building a strong pipeline. We're also expanding in the lottery space with a Q3 launch anticipated with the Mass Lottery through our partnership with Aristocrat Interactive, which will bring us to being live in four lottery states. We expect to update the market later this year on a few key customer additions and product enhancements. Virtual Sports remains a unique, differentiated product with high margins and significant barriers to entry, and we continue to view it as an important part of our digital strategy. Overall, we're pleased with the second quarter and the first half results, and we look forward to updating you on our continued progress in the second half. And with that, I'll hand it back over to Lauren.

Thanks, Brooks. That was a great deep dive into the range of initiatives going on throughout the company. In slide 12, we summarize the transformation we anticipate playing out through the end of 2027. The midpoint of EBITDA and EBITDA margins are expected to reach 130 million and 47% Leverage is projected to decline to under 2.5% and free cash flow conversion should comfortably be between 25% and 30%. Let me now return to the subject of pro forma free cash flow that I referenced earlier on. As a result of the contractual working capital adjustments associated with the restructuring of our pubs business. We had a one-time non-recurring cash outflow in the first half of 2026 of approximately $7 million, which is fully reflected in the reported free cash flow numbers. In that case, the free cash flow projection for the year of $23 million, shown in slide 13, becomes $30 million on a pro forma basis, or over 25% of EBITDA. our business mix swings more towards less capital intensity and our declining leverage generates interest savings, we can expect that the conversion percentage will continue to improve from 25%. And then finally on slide 14, not to beat a dead horse, but all this comes together in the slide where we reprise the elements of the 2627 plan. I think that speaks for itself and there really doesn't require much comment. And with that, we can turn operator to Q&A, please.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ryan Sigdahl with Craig Hallam Capital Group. Your line is now open. Please go ahead.

Hey, good afternoon, guys. I want to start on interactive, staring at slide five, but the growth We talked to some of the business owners that we talked to. So that has decelerated pretty substantially. You explained that UK tax increase in the flow through of that, just given your share of gaming revenue click into that what the uk revenue performance was versus elsewhere or what the mix of the uk is or somehow to try and get a better underlying performance of x us or or ex UK, excuse me, from an interactive standpoint? Yes, well,.

I'll try to answer the question and see if this is what you're looking for. You know, obviously, as we put with the statistics on here, you know, the in the UK specifically was up 40%, but obviously the impact of the tax had the negative impact that you've seen on the on the revenue and EBITDA performance. In terms of gaining, in essence, you know, we think we gained share in the second quarter in the UK. The official UK GC numbers aren't out yet, but certainly in our conversation with some of our biggest operators, I'm sure. operator customers, they've said to us that we're continuing to kind of climb the ladder of performance with them. So even though the tax had obviously a pretty negative impact, frankly no more than what we had originally anticipated or guided to. But in essence, we're continuing to grow in both the North American and the UK markets.

Are you able to give what growth was ex-UK?.

I don't think we do we break that out, Eric?.

We don't break it out, but we can get back to you. Why don't we get back to you, Ryan, on that one? so we don't give you a number that's 100%.

we know for sure that the revenue growth outside of the UK was significantly higher than it was in the UK, just because the increase in the tax, I mean, if the tax had doubled from 5% to 10%, that would have been relatively insignificant. When the tax doubles from 20%, the 40%, if you go through the algebra, the, you know, what would have been a 20, indexing and a $20 tax becomes almost a $60 tax. And that comes straight off the top in terms of revenue. So the revenue was... positive in the UK, which is a miracle. Most of most operators had obviously significantly declining revenues, but it was less than the 15% global in my remarks, Ryan, is that once we lap the second quarter. So when we get to next year, then the year-to-year comparisons will have the same tax rate. So if our, uh, GGR continues to grow 40%, our revenues will continue to grow 40% and we'll see a re-acceleration back to where we were before. But unfortunately, we have to suck it up for the balance of this year. Sticking on taxes, I think, yes,.

Yes, Sticking on Tax is a think tank in the UK. They've recommended increased tax on online gambling last year, now they're backing an increase to B2 gaming machines in this year's budget. Curious, what you guys are hearing boots on the ground there and any, any thoughts you may have around that.

Yes, well, I think one of the things that we're hearing is that the, you know, the industry probably in the online gaming tax, there was, you probably will know that there were a bunch of different factions. You know, horse racing had one view, the betting shops had another view, and the AGCs had yet another view. I think seeing how draconian the measures were and doubling of the tax rate, I think everyone in the industry now feels like they need to be aligned against this. And you've probably read, obviously read one side about increasing the taxes, but you obviously see on the industry side. What the potential job loss and and high street kind of decimation could be if there if the taxes were going up, like this group had suggested. So, look, it's impossible to predict, but we're certainly hearing and hopeful that it will be. If there's any increase in tax, it will be measured. and not what that group has suggested.

Very good. Good luck, guys. Thank you.

Your next question comes from the line of Matthew Mouse with B. Riley Securities. Your line is now open. Please go ahead.

Matthew DeJong, Josh Pardue, As Matthew offer Josh, thank you for taking my questions so I had a similar kind of question on interactive i'm just wondering, you know it's step down revenue step down sequentially slightly. Matthew DeJong, Josh Pardue, i'm wondering, is this more of the trough for the year, and how are you thinking about the sequential path from here into the seasonally strong fourth quarter.

Yes, I mean, I think the view is that and we tried to illustrate this in the slide with some of the history is that we think sequentially, you know, the, the interactive business historically over the last few years has grown. The 3rd quarter is better than the 2nd quarter. The 4th quarter is better than the 3rd quarter and we see nothing. to change our views on that. So we expect it to grow sequentially quarter. I mean, the key thing is, just to come back to your observation, is... is the second quarter sequential.

observation you made is completely due to the tax. The underlying business is growing like crazy. So now that the tax is in the calculation in the second quarter, the third quarter will reflect the full growth. in the GGR because there'll be no increase in the tax to offset it. So the second quarter is definitely a trough and the third and fourth quarter should look very good.

Great. Sounds good. Last question for me is mainly just on free cash flow conversion. I mean, you're guiding to 20% plus this year. I'm wondering what carries the conversion higher in the back half? And as leverage approaches closer to 2.5 times, does that open a refinancing that brings down the cash interest you're paying?.

Yes, so the main difference is that, as I mentioned in my remarks, that in the first half, we had this $7 million working capital adjustment associated with the restructuring and shutting down of part of our pubs business. And that was pure cash outflow that directly impacted the free cash flow in the first half, which we don't expect to see in the second half. Well, we know we won't see it in the second half. without overly complicating it. That's the main reason. Got it. Great. That was all for me. I'll hop back in queue. Thanks.

Your next question comes from the line of Barry Jonas with Truist. Your line is now open. Please go ahead.

Hey guys apologies if this was addressed but you know the UK growth offsetting the UK tax increase very impressive help us understand how do you think those gains will be sustainable I mean is this really just content driven or do you think once you lap the William Hill reallocation.

the allocations, market share gains potentially slow. Thank you. Well, the William Hill allocations, the William Hill allocations, that's all the retail thing, Barry. So that wouldn't have anything to do with the digital market.

BUT THE DANCE, THE... GO AHEAD, BARRY. I'M SORRY. NO, NO, APOLOGIES THERE. Yes, JUST HOW WE UNDERSTAND THE SUSTAINABILITY OF THESE MARKET SHARE GAMES.