Light & Wonder, Inc. (LNWO) Earnings Call Transcript & Summary

Welcome, everyone, to the Scientific Games Strategic Review Investor Conference Call. [Operator Instructions] Please also note today's event is being recorded. Now let me turn the conference call over to Jim Bombassei, Senior Vice President of Investor Relations for Scientific Games. Mr. Bombassei, you may begin.

Thank you, operator, and good morning, everyone. During today's call, we will discuss the actions we announced today as part of our strategic review to transform Scientific Games. With me this morning are Jamie Odell, our Executive Chair; Barry Cottle, our CEO; and Mike Eklund, our CFO. Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our release issued earlier this morning, the materials relating to the call posted on our website and our filings with the SEC. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website at scientificgames.com. Also, supplemental reference slides are available on our Investor Relations website. These slides are meant to facilitate the discussion. Now I want to turn the call over to Jamie.

Good morning, everyone, and thank you for joining us. Today represents a significant milestone for our company, and we're excited to share the key steps we're taking to rapidly make our vision for the company a reality. I'll begin by sharing the outcome of the strategic review we've been working on since last September with the Board, and then Barry will outline our vision for Scientific Games and our path to become a leading global game company. Afterward, Barry and Mike will take your questions. So let me start by saying how pleased I am to be here to speak with you today about the strong decisive steps we're taking as a result of our strategic review to achieve our vision to become an industry-leading content-led growth company with a materially increased focus on digital markets. We strongly believe this will deliver significant shareholder value and sustainable growth. I want to recognize and thank all of our senior leaders and their respective teams for continuing to drive real momentum in their business, while the Board and our management team worked through this detailed process, during which we have drilled down deeply on all aspects of the business. Last fall, after new institutional investors acquired a total of approximately 35% of our stock, and I joined the Board as Executive Chair, I told stakeholders that we were focused on rapidly deleveraging the balance sheet, unlocking the value of the company's products and technologies and creating a flexible, nimble company, positioned to deliver above-market returns to investors. We immediately embarked on a comprehensive strategic review evaluating a range of options as we look to determine the best path forward for Scientific Games. Our ultimate goal is to unlock the tremendous value in each of the individual businesses and to turn Scientific Games into a sustainable growth company with a transformed balance sheet and enhanced focus on industry-leading content. On our last earnings call, we outlined 3 key strategic pillars to unlock this value. Firstly, optimizing our portfolio to focus on driving our key areas of differentiation in content and in digital channels where total addressable markets are large, profitable and fast-growing. Secondly, investing in our largest growth opportunities, both organically and inorganically, to become a sustainable growth company. And thirdly, significantly delevering, transforming our balance sheet to enhance our financial flexibility and capacity to invest in our future. Pleasingly, the review confirmed our incoming perspective of the strong positions and bright features of our 5 market-leading businesses as well as the untapped value and opportunity that lies ahead for Scientific Games. It also confirmed our renewed focus on building a great organization based on a high-performance culture and an absolute determination to recruit, engage and retain the greatest talent. We're already making great progress in this area, and we'll continue to make this a priority. With the review now complete, we are moving swiftly, taking the following significant steps to streamline our portfolio and accelerating our progress towards achieving our vision. We have concluded that our Lottery and Sports betting businesses will be best positioned for the future as independent businesses with their own capital structures and investment strategies. We, therefore, intend to divest those businesses. We're confident that the separation of these businesses will provide their respective strong management teams with the best foundation to build on their current momentum and capitalize on the strengths of their business. We expect this to create exciting opportunities for their employees and customers. We'll be exploring ways to work with those businesses in key areas following the divestitures. We are pursuing strategic alternatives for the divestitures to optimize value for our shareholders, including an initial public offering or combination with a special purpose acquisition company or a sale or a strategic combination with another business. And we intend to deploy the net proceeds from these transactions to materially delever the balance sheet and invest in high-growth opportunities to accelerate our strategies. As you can appreciate, we are not able to provide additional specifics at this time on the strategic alternatives, but we look forward to keeping you updated as appropriate. Now I want to turn it over to Barry to talk more about our future direction.

Thank you, Jamie. I'd like to tell you more about our vision to be the leading game company in the world, leaning into content and digital and built around our leading gaming, iGaming and SciPlay businesses. These businesses have always been focused on developing great content and building great games. But with a renewed focus and balance sheet strength, I've never been more optimistic about our path forward. This new organization will be uniquely positioned to build and deploy great games and franchises that could be made available to players on any platform where they want to play, conceived by the most talented game designers in the industry and enabled by best-in-class technology platforms that deliver a seamless player experience, building evergreen cross-platform franchises and enabling systems and technology for our players and customers, provide sustainable differentiation, greater growth and margin. Our biggest growth opportunities are in rapidly expanding digital markets, where we lead today and where we are determined to expand our market leadership across all forms of content and games. The digital transition in our industry represents an incredible opportunity. And we are targeting our digital businesses to be comparable in size to our land-based gaming business in 3 years. The strategic actions we announced today concerning our Lottery and Sports betting businesses will ensure we have the balance sheet to take advantage of opportunities to make content-focused digital acquisitions that will enhance our iGaming and SciPlay businesses and help drive growth. And over time, we are ideally situated to capitalize on the increasing convergence of these businesses, particularly as players look to play their favorite games wherever and whenever they want to play. Today, the businesses already have strong momentum. Gaming is making great strides as it executes on its strategy and product roadmap, positioned to come out of the pandemic as a stronger competitor and gained significant market share. With a more efficient cost base and strong cash flows, gaming will be an engine to fuel our investments to drive long-term growth. Our iGaming business is the market-leading content provider and digital platform, supporting 24% of iGaming in the U.S. and has a leading presence in the U.K. and Europe. iGaming will continue to benefit from accelerating industry tailwinds and its strong original content offering as we develop more must-have content and leverage our land-based franchises. SciPlay continues to outperform the market and has exciting opportunities for growth as it expands into the $20 billion-plus casual marketplace. This evolution of SciPlay, as it builds out the casual game pipeline and diversify its revenue streams, will drive sustainable growth and cash flows. iGaming and SciPlay are positioned in some of the fastest-growing parts of the digital marketplace with the collective long-term TAM for iGaming, social and casual gaming projected to reach over $50 billion by 2025, up from approximately $30 billion today. Individually, our Gaming, iGaming and SciPlay businesses are market leaders with great momentum, but the sum is far greater than the parts. There are several key areas where these businesses can work collectively to enhance our growth and competitive position, including developing cross-platform franchises, integrating converging platforms and harmonizing our commercial approach with our partners. Today, we are leaders in content across land-based and digital with great franchises like 88 Fortunes, Dancing Drums and MONOPOLY. Our land-based franchises resonate across all platforms, driving approximately 30% of the $2.2 billion of GGR generated on our iGaming platform last year and forming the foundation for SciPlay's social casino offering. Great games and franchises are a competitive differentiator and generate recurring returns for both the company and our shareholders. This is an area we have invested in, attracting some of the top industry talent to complement our existing team of renowned game developers while we already produce amazing content with hit franchises that engage players across platforms and an expertise in commercializing creativity. With this new strategic focus, we will be well-positioned to significantly enhance our game roadmap with a fully cross-platform approach, building and launching more compelling evergreen franchises with great games that players can play year after year across any platform with or without wagering. Players want to play recognizable franchises with proven game mechanics and math models that enrich the game narrative and player experience. No gaming company can match our ability to deliver fully cross-platform in all formats, providing players with an authentic franchise experience no matter where they choose to play and providing us with higher returns on every dollar of content spend. As the leading land-based systems provider and with the leading digital content platform, we are solely in a prime position to provide our partners with innovative technology solutions to deliver a seamless player experience. With market initiatives such as cashless and unified wallet that no other company can match, no matter what platform players choose to play, we will be able to recognize them, allowing operators to customize player engagement, manage their wallet and account, including loyalty points across all play activity and creating a more engaging connection between players and operators. This is a very exciting time as we build the leading cross-platform global gaming company, which will create opportunities and value for all of our stakeholders, our shareholders, employees, customers and partners. The strategic actions we announced today represent major steps in our transformation, streamlining our portfolio and transforming our balance sheet while enhancing our ability to invest in growth opportunities, enabling us to deliver on our vision to become a content-led company with an increased focus on rapidly expanding digital markets and with sustainable, profitable growth. Our new company will be a place where the best talent wants to work, creating the games and solutions our customers want as we define the future of gaming. I'm excited for our next chapter, and I can't wait to tell you more about this journey as we move forward. Now Mike and I will be happy to take your questions. Let me turn the call over to the operator.

[Operator Instructions] And our first question today comes from Barry Jonas from Truist Securities.

Wanted to start -- maybe you can -- can you walk us through in some more detail why you specifically chose Lottery and Sports betting to sell?

Barry, thanks for joining us today. This is Barry, and I'll take that one. Barry, we started with the enviable position of having 5 great market-leading businesses. But to align with our vision to become the leading cross-platform global game company, we made the tough decision that Lottery and Sports betting would be best positioned for the future as independent businesses where they can focus and capitalize. And with this new organization, we believe the sum is greater than the parts because it enables us to really deliver on the vision to become the leading cross-platform global game company. Collectively, Gaming, iGaming and SciPlay will be singularly focused on building and deploying great games and franchises across all platforms. And as you know, we're -- actually well along on this journey, we have -- with franchises like 88 Fortunes, Dancing Drums and Coin Combo. And when you layer on that, a rapidly deleveraged balance sheet, we will become a more flexible, nimble organization in order to -- that will enable us to invest organically and inorganically into content and digital opportunities. So it gives us strategic focus and the capitalization to really go and pursue this for success. And because of that, we're confident that we have the right plan in place to create long-term sustainable growth company, and I couldn't be more excited about that path forward.

Okay. And then just as a follow-up, is there overlap or synergies between those 3 pieces now that you're going to need to manage with the separation? And maybe more specifically, where does iLottery fit with this new structure?

Sure. 2 questions here. I'll actually start with the second one. So iLottery is a natural fit with Lottery, a natural extension of that business, and just like, by the way, iGaming is a natural extension with the Gaming organization. And so if you think about our new organization, we'll be 100% focused on developing great content and games for the -- in the games market. And in fact, e-Instants is content that both the Lottery as well as the new organization will create. We provide e-Instants today to casino operators everywhere. But iLottery is a natural extension and will go with the Lottery business. In terms of the separations, these businesses are all very distinct verticals with increasingly specialization that's necessary. And so their focus and independence and the ability to capitalize will actually position them both with all 3 for better success.

Our next question comes from John DeCree from Union Gaming.

Congratulations on the conclusion of the strategic review, exciting news this morning. Barry, I wonder if you could maybe give us a little bit more color or try to elaborate on the process from here. So you, obviously, have indicated to the market that there was a strategic review and something to be expected around this time. But when we think about the time line from here, you've laid out a number of avenues, a SPAC, IPO combination. Can you give us any insight as to where you are in the process? Have you started any of those processes? If we think about -- we've asked for time lines. So I'll stop short of asking for a time line realizing you probably can't give one, but what should we expect in terms of the process from here?

Yes. Actually, John, this is Mike. I'll grab the first part of that, if that's all right with you. By the way, it's always good to talk to you. Appreciate the question this morning. At this point, we're looking at all avenues to maximize the value on the sale. And Barry and Jamie mentioned what all those would be very familiar to what you might expect. At this point, ultimately, the market is going to determine the timing, the value, final structure of the deal. When we have more information on that, we'll obviously come back and share with you. What I would say though is we're very well advanced in the process. It's been a thoughtful, detailed planning process that we've gone through with all the teams. I've had a chance to fully review that. The internal leadership team, we're all extremely excited about it. With the Board, they're all extremely excited about it, and with all of the financial advisers that we have involved in the process. And so we're deep into the process. It's well underway. It's incredibly thoughtful. And we think we can move pretty quickly and maximize value while we're going through this, and we'll get this to a good quality outcome in very short order. We'll come back and share more of those details with you when it's appropriate.

Got it, Mike. That's helpful. I -- just on the same theme, a follow-up on that. I guess in some of those scenarios, perhaps a SPAC or an IPO would -- presumably Scientific Games would be able to sell a portion of the business. Is your strategy to -- or do you have a preference to divest the entire business? Or could we see something where Scientific Games owns a minority stake in some of these businesses, if you go the SPAC or IPO route?

As Barry and Jamie both lined out earlier, we have a singular focus on being the leading global games company, focused on content, digital, high-growth markets with the synergies across the businesses that we talked about. With that in mind, our intent is to fully divest these businesses and allow them to pursue their own independent path going forward. And again, we think this provides the right balance sheet for us to invest organically and inorganically and supports the vision that Barry and Jamie lined out earlier this morning.

Our next question comes from Ryan Sigdahl from Craig-Hallum Capital Group.

Congrats on the update this morning. One question for us. You mentioned the online business is expected to be a similar size as traditional gaming in 3 years. That implies a $2 billion-plus business in 3 years versus about $750 million by my math today. So 3x growth. Is that organic or are you including M&A and acquisitions and other strategic actions within there?

Yes. Great question. This is Barry. I'll take that. I'm going to step back real quickly just and mention games is a huge market. People love to play games. And the digital games market is incredibly material. If you think about it, just the social casual, social casino and iGaming space alone as a TAM, you expect a TAM of over $50 billion over the next couple of years. And we know that games and building the games are a huge differentiator. And we know that players love to play the games that they love across all platforms, proven -- the recognized franchises with proven mechanics. So our company today is positioned so well that no other company can really match our ability to attract this space. If you look across iGame, SciPlay and Games, we have the leading position, we are the leading content aggregator, leading content provider, leading digital enabling platform. And so as we have the singular focus collectively across Gaming, iGaming and SciPlay focused solely on building and deploying great games and franchises and also as the leading systems provider and leading digital platform provider, we can uniquely deliver the seamless player experience as we go into digital. We're in incredible position to go attack the digital games market. Layer on top of that, as you mentioned, a newly deleveraged balance sheet, it enables us to have that flexibility to both organically attack the space as well as more aggressively inorganically attack and expand that leadership position, which gives us the confidence that we're going to be able to achieve this vision and goal.

Yes. And Ryan, this is Mike. I would only add to the back of it that the strategic review that we've gone through over the last several months together as a leadership team and with the Board, including one, the outcome of the divestitures today that we believe will materially delever the balance sheet and free up some investment capacity for inorganic growth. The strategic review also included a very detailed point of view and pipeline on targets that might be out there. Anything that we do will be in the construct of maintaining a healthy balance sheet, a transformed balance sheet, maintaining that equity story. But certainly, inorganic activity is a part of that, and we look forward to providing more details in the coming months with you on how we're thinking about that.

Great. One quick follow-up and then I'll turn it over. But I guess why announced this morning versus waiting until you had concrete details of how you're divesting purchase price proceeds, et cetera?

Yes. I would say we're far enough along in the process now where it made sense to get it out there. Obviously, when you're doing these kinds of transactions, trying to control the narrative around it and the timing of when it gets to The Street and making sure all of our team members are bought in and understand, it was really important to us, right? We want to make sure our customers, our employees and others don't hear things from the market. We wanted to hear them from us. So today is really about just getting everybody aligned so we can build on that type of process internally. But again, we're well enough advanced in the process now that we believe we can get this to a logical conclusion, and we'll look forward to coming back very soon with what the [indiscernible] structured valuations, all the things that you mentioned look like.

Yes. And I'll just add on top of that, that going forward, we want to move quickly. And as Mike said, we're well along in the process. And so we thought this is the natural time for us to make the announcement and let the market know where we're headed.

Our next question comes from Jeff Stantial from Stifel.

Congrats on the announcement this morning. I wanted to start on the sales, specifically in the digital Sports betting business. Specifically, I want to ask how it's going to work disentangling the Sports betting assets from your iGaming offering. My understanding is you do provide some portion of back-end technology to both Sports betting and iGaming operators. So just curious how you plan to break those assets out or if there's any kind of work to be done to get those bifurcated out?

Absolutely. This is Barry, and I'll take that one. Let me first start by saying that we actually expect that the separation of sports and iGaming will actually enhance the market position for each of these in the marketplace. These are actually increasingly specialized verticals and the decisions on success of Sports and iGaming are really made on their own merit. And while we have common customers, just like we have common customers with land-based, contracts are predominantly built in a way that are -- that where the commercial economics are tied to the actual business itself. And so, as Mike had mentioned earlier, we're well along this process as well, and we're extremely confident that the result of this transaction is going to put both of these in a position to be more successful because of the focus and capitalization that they get -- they'll get. And as I mentioned about iGaming being the natural extension out of Gaming, the success of iGaming is actually tied more to the success of land base. So if you think about what drives the success of iGaming, it's building great hit games. And so launching an iGaming 88 Fortunes, Dancing Drums, Coin Combo, that is really what is -- determines the success, which hence drove us to how we strategically divided up these businesses.

Yes. I think importantly, on the back of what Barry said, there's always varying degrees of complexity in these kinds of transactions. What I will say, though, and I'm very proud of the teams for, we had detailed locked plans aligned across the entire organization. They have the customer at the forefront of everything we do. They have our employees at the forefront of everything we do. We have the leadership team. And what I can tell you is, internally, those plans are locked and ready to go. Everybody is excited about the future of both of these businesses.

Okay. Great. That's helpful. Moving on to kind of organic growth, it sounds like the majority of proceeds here are going to be allocated to delevering the balance sheet naturally, but you also touched on opportunities to redeploy some capital to growth areas. Can you expand on that just a bit further? What sort of tuck-in acquisitions might you consider? And how should we think about the focus for internal R&D to the extent that you do kind of redeploy some of this excess capital in that direction?

Sure. I'll start. First of all, the new organization is actually positioned really well today with leading positions in their respective marketplaces, and the major pieces are already in place to achieve our strategy. That said, with the strength in balance sheet, that will allow us to make smart, targeted content-focused digital acquisitions that will enhance our position and accelerate our strategies to support this vision.

Yes. There was a couple of things in there that I picked up on. I just want to see if I can pull the thread on each of them. Look, we believe that the size and nature of these transactions will allow us both to materially delever and invest in an organic growth. The majority of it is, obviously, going to go to get to this equity story that we talked about, get the firm delevered, deliberate us from the debt that we've had that has kind of limited our ability to move as quickly as we'd like. But again, there's enough dry powder to where everything Barry just said about inorganic growth is there. And as I mentioned earlier, we've got a very developed pipeline that was also part of the strategic review, and we actually look forward to sharing a whole lot more with you in the coming months on those items. I will say one thing that you picked up on that you mentioned was R&D. If you think back to what we said earlier in the year, I mean, R&D is, obviously, a big piece of this to get after the organic growth as well. Within the Gaming business, we put a lot of incremental money behind R&D to give the team everything they need to get the best games, the best cabinets out there in the market and get that business rebuild and gaining share. We did all of that while self-funding it through other cost-cutting measures, you might recall. And so we think we've got it on both sides here. We've got the R&D in the Gaming business really built up. They're doing awesome things with it. We've got plenty of dry powder to go after the inorganic stuff that Barry is talking about, and then we think we will materially delever off the back of this as well and get to that equity story that we've been talking about.

Perfect. Great. Just 1 more...

Go ahead.

Sorry, just one more quick one, if you don't mind squeezing in. I know you didn't prerelease or preannounced in the release today, any high-level thoughts on the quarter, and then I'll hand it off.

Yes. In the quarter, it's turning out to be very strong. Again, the momentum that we saw in Q1 continued into Q2. Gaming business is starting to recover. You guys are seeing it as well. We've seen your consensus expectations so far, and we're very confident in those numbers that you have out there, and we look forward to sharing a whole lot more with you at our next quarter earnings call, which I believe is going to be August 9.

Operator, we have time for one last question.

And our final question comes from Chad Beynon from Macquarie.

Mike, just to follow up on your side of the business. Are there different tax consequences if you go with the IPO, the SPAC route or other ones? And how could that affect the NOLs at the RemainCo business?

Yes. You bet. Well, as you know, we're exploring a lot of different options right now, and all options to maximize value. The market will ultimately determine the final structure value, timing of the transactions, et cetera. As you know, we do have $1.3 billion in NOLs, as we talked about before on these calls, given the tax basis in both of those businesses are very low. The good thing is we think we'll fully utilize these NOLs to minimize the cash tax impact on the transactions. But once we get a little further along in the process, we'll come in and fill out all the detailed blanks for you on that one.

And then -- sorry, the second one that I had, guys, just from a cost containment or margin optimization standpoint. I know last quarter you updated some of these numbers. As you move some cost around to different businesses, whether it's segment costs, corporate costs or CapEx, are there further opportunities to maximize margins or free cash flow at the land-based gaming business? And that's all for me.

Yes. I think the answer -- the short answer is yes. We talked about the $50 million of cost that we were going for. Those plans are well developed. The teams are getting after them. I will say this, this is really about repositioning primarily NewCo, RemainCo, our new company for growth in the future, right, so that we can take advantage of these marketplaces that Barry has talked about. We do want to be a lean and mean organization as we do that. But broadly, it's about growth. As you've heard me say several times on the cash side, I'm very optimistic about the ability to keep getting after working capital, keep getting after free cash flow. The teams are all leaning into that conversation. We do expect to do more there, and we have high confidence in our ability to deliver the cost takeout that we've talked about thus far, both last year, which are done now as well as the pipeline of items that we're working on for this year. But again, a lot of that is just about streamlining our processes, making the organization more efficient, making us great customer experience, great employee experiences and just great operational excellence. It's kind of the way we're talking about it internally.

Great. Chad. Thanks for the questions. I'm going to turn it over to Barry for some final remarks.

Thanks, Jim. I hope everyone can see why we're so excited about our announcement today. No gaming company can match our ability in delivering today across all markets as we're migrating into a more converged world. Going forward, collectively, our new organization will be singularly focused on building great games and franchises to deploy cross-platform. We think this is great news for players, welcome news for our customers. And as we unlock the value of Scientific Games, we expect this to create even more opportunities to our talented workforce to advance their careers. We are already well-positioned and on our way. Now we are better together with a singular focus and stronger balance sheet, and we're excited about the possibilities and where this is going. Thank you so much, and we look forward to sharing more in the future.

Thanks, everyone, for joining us for our call on such short notice. I'll now turn it back to the operator.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.