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

Welcome to the Light & Wonder Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Nick Zangari, Senior Vice President of Investor Relations.

Thank you, Operator, and welcome, everyone, to our second quarter 2024 earnings conference call. With me today are Matt Wilson, our President and CEO; and Oliver Chow, our CFO. During today's call, we will discuss our second quarter results and operating performance, followed by a question-and-answer session. Today's call will contain forward-looking statements that may 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 earnings materials relating to this call posted on our website and our filings with the SEC. We will also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings release located in the Investors section of our website. 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. With that, I will now turn the call over to Matt.

Hello, everyone, and thanks for joining the call. First and foremost, I would like to commend the team on the exceptional results in the quarter and throughout the first half of the year. Our continued double-digit consolidated revenue and AEBITDA growth keeps us well on track towards our 2025 target. Momentum remains strong with the industry demonstrating continued stability coming out of 2023, where we saw record gross gaming revenues in the U.S. In fact, Light & Wonder's scale of our leadership position across our businesses enabled us to capitalize on a range of growth opportunities. We are well positioned with our global presence, extensive library of proven game franchises diversified casino product portfolio and unique cross-platform strategy to execute on future prospects in both land-based and digital spectrums. In addition to our strong operational and financial execution, I'd also like to highlight a couple of other noteworthy achievements. In June, we completed the company's first-ever share repurchase program in just a little over 2 years and authorized a new 3-year $1 billion buyback program as we continue to see tremendous value in Light & Wonder. Our CSR and ESG efforts are also progressing as we continue to execute on the diverse set of initiatives that were highlighted in our recently published CSR report. The all-around effort we are seeing across the organization is a true testament to the culture and people driving our success. Additionally, we have a clear strategy underpinned by a robust product road map, which will further fuel our growth. With that, let's look at the operational highlights. In gaming, we continue to see strong momentum and solid execution on our commercial strategy. Our performance reflects the power of the portfolio, where franchise success can be replicated and leveraged across markets and business models. To put this in perspective, our North American premium installed base has grown for 16 consecutive quarters and now is at approximately 50% of our total North American installed base. We added over 1,000 units sequentially in North America on the back of our evergreen franchises with revenue per day surpassing the $50 mark. Our Dancing Drums, Ultimate Fire Link, Journey to the Planet Moolah, Dragon Train and Monster's franchises remain strong performers, providing a solid foundation to our fleet. We anticipate a Cadence rollout in the second half with titles such as Squid Game, which we recently launched and Huff N' Puff Money Mansions, a game extension of our highly successful for-sale franchise that's been introduced under the lease model to drive growth beyond 2024. Given the timing of new title launches, we saw record North American installed base additions in the second quarter. Going forward, we expect continued elevated unit growth in the second half of the year, but at a more measured pace relative to the second quarter edition. On the game sales side, we saw continued momentum in both North America and International, with over 11,300 units shipped in the quarter globally. In addition to our North American core replacement, we also capitalized on adjacent market growth opportunities in the quarter. In fact, the performance of our games were so well received that Oregon Lottery followed up with a second order of 1,200 units less than a year after the initial shipment reflecting our strength and continued progress in the video lottery markets. Additionally, we've made significant progress in the coin operated amusement machines and historical horse racing markets both of which are growing opportunities for us as we deploy more engaging game content across the board. The strength of our game content is on display with Light & Wonder taking 3 of the top 5 top indexing core games in the latest RS report. Huff N' Even More Puff retained the #1 spot again with even more units on the floor, and our quick hit gains rounded out the top rankings on the chart. Pleasingly, our ship share in Australia was once again #1 in the quarter, and we look to extend this momentum through new games and extensions such as Shenlong Unleashed and Jewel of the Dragon. Our strong international presence is also reflected in the continued sales in Macau and the U.K. where we have a long-standing partnership with Entain. These are all examples of the benefits of our global reach and diverse end markets, fueling continued momentum in game sales. In the systems business, we continue to drive progress through product capabilities enhancements, which has led to contract wins as well as hardware replacement opportunities. As a leading global systems provider, we will continue to innovate and integrate our software and hardware to provide operators with best-in-class solutions to run their operations efficiently. We continue to see stability in our core tables business and we are currently working on several initiatives, which will elevate our product offerings in the future. Our diversified gaming portfolio is providing growing revenue strength to fuel investment in the business, supported by sustained momentum as evidenced by our continued expansion in key markets. Our performance reflects a true inflection point, and we expect to build on this momentum as we continue to expand and build out our studios and franchises. On to SciPlay where once again, our team executed seamlessly on its growth and margin initiatives, delivering over $200 million in quarterly revenue for the third consecutive period. We've outpaced the social casino market for 10 consecutive quarters with now 11% market share driven by our operational prowess to grow games and prudent approach to user acquisition. Our philosophy here remains the same. We will be diligent and smart with UA spend focusing on returns and we'll look at incremental campaigns and other opportunities as they arise. Additionally, the SciPlay engine will continue to do what it does best, optimize player engagement and enhance the player experience backed by our library of proven franchises and games. We've consistently delivered a product offering that improves monetization as we've seen in our performance. In fact, we continue to see record monetization numbers in average monthly revenue per paying user and average revenue per daily active user. Both metrics grew double digits compared to the prior year period as we continue on the trajectory of sustainable monetization growth. Notably, we're also seeing solid omnichannel progress with the successful launch of franchises such as Huff N’ Puff globally. The cross-platform exposure from our coveted franchises and games enables cost-effective player acquisition, allowing further flexibility to execute on our expansion initiatives. Meanwhile, our direct-to-consumer platform is progressing nicely as revenue generated this quarter is now approximately 12% of SciPlay's total revenue. As I've mentioned previously, we have a deliberate strategy with the rollout and we are pleased with the progress here as we wrap up our initial phase of the program. The user feedback we received was instrumental in the development of the platform, and we will continue to prudently expand this offering to a broader base of players in phases and scale at an appropriate pace for customer engagement as part of our long-term initiatives. While we've made significant strides on the rollout this year, we would expect a more limited growth in DTC as the percentage of revenue in the back half of the year given the cadence of our rollout across games. The success at SciPlay has been phenomenal, and we continue to execute on our user execution and engage in a monetization blueprint while planning for new games and driving learnings for our expansion in ad tech. Turning to iGaming, where we continue to see healthy growth across all U.S. states and scaling on our content on our open gaming system platforms driving uplift compared to the prior year period. The OGS platform continues to deliver record growth gaming revenue volumes in the U.S. and C Canada as we saw year-over-year increases of 25% in both regions. In the more mature U.K. EU markets we've worked hand in hand with our partners and navigated changing dynamics in the market well, demonstrating our adaptability and strength of our regionalized market to choose content. Importantly, our experience and first-mover advantage in the industry continues to differentiate our products as we build and expand our offerings such as enhanced marketing capabilities to improve player engagement and experience for operators. As previously noted, the scale of OGS is second to none. We now have over 85 partner studios and 570 operator brands plugged into OGS and continue to extend our reach into all legalized jurisdictions with our 2-sided network, making the best games available to players. Lightning Box, Elk, Playzido and our Live Casino offerings are just some of the examples where we are expanding the network and our product portfolio for all parties in the iGaming space. While plug-and-play studios such as Lightning Box and Elk are more readily available to scale for immediate success, we're equally excited about the long-term prospects of Playzido, which is now live in 3 major U.S. iGaming states and Live Casino, where we continue to expand our partnerships as we go live with Penn in the back half of the year. We are confident the investments into our iGaming portfolio will ultimately bear fruit with the support of our team's focused execution. We will continue to leverage our leadership position and expand our robust portfolio to capitalize on the opportunities that the fastest-growing gaming sector presents us. As we move past the halfway mark in 2024, I am more confident than ever in the team's execution to plan and product road map. Our cross-platform strategy fully accentuates the power of our portfolio as we continue to see our brands and franchise expand across land-based, social and iGaming channels. Notably, we are in an enviable position with our global presence and scale, which is key to sustainability in the industry. We will continue to focus on R&D investment and innovation to elevate the overall gaming experience, which will ultimately translate into growing market share. As many of you have heard me say before, although our outstanding team continues to deliver quarter after quarter, we are still in the early stages of growth across our business, and the best at Light & Wonder is yet to come. With that, I'll turn it over to Oliver to review our quarterly financial results.

Thanks, Matt. Glad to be with you all on the call today to share our Q2 results. We have continued to execute and deliver tangible progress quarter after quarter, especially against our key financial performance metrics as we work towards our target. This consistency is a hallmark of our organization and speaks volumes to the high standards we hold ourselves to. Continuing on the strong momentum that we began the year with this quarter marks our eighth consecutive quarter of double-digit consolidated revenue growth as consolidated revenue increased 12% year-over-year to $818 million, driven by performance across all businesses. Operating income was $175 million in the quarter, an increase of $62 million over the prior year, primarily due to the higher revenue and stronger margins we saw along with lower D&A, which was slightly offset by higher restructuring and other costs, which included a $32 million charge in the current year period related to certain legal matters. Consolidated AEBITDA grew 17% to $330 million compared to the prior year, resulting in a consolidated AEBITDA margin of 40% for the quarter on solid top line growth and margin contribution from gaming and SciPlay. Adjusted NPATA increased 40% year-over-year to $130 million in the quarter, primarily on revenue growth across our businesses and margin expansion. Turning to our business segments. In gaming, we continue to see strong financial and KPI momentum underpinned by the execution of our game franchises and diversified product offering. Revenue was up 14% to $539 million in the quarter, led by global gaming machine sales growth of 32% and gaming systems growth of 14%. The AEBITDA grew 17% to $272 million compared to prior year, driven by revenue growth in the period. Gaming AEBITDA margin increased 100 basis points year-over-year to 50% in the quarter as we further optimized operations for margin opportunities. We do expect a modest impact on margins in the third quarter related to the announced Entain deal. This order is a great example of the benefit of our global footprint and the upside that comes from the quality of the product that the team is producing. It is noteworthy that the bulk of these units will be delivered in the third quarter at a lower ASP but has a recurring revenue component moving forward, making this a great long-term value for the company. Gaming operations revenue increased 5% year-over-year as we continue to see growth in the North American installed base, up 7% to 32,566 units representing a true inflection point in the quarterly installed base growth rate for us, led by the increase in our premium and Class II footprint. Revenue per day rose 4% year-over-year both in North America and international, with North America breaking the $50 mark, reflecting the strong performance of our games and the progress on the installed base optimization. We continue to execute on our strategy on the global game sales front with revenue up 32%, primarily driven by sales in Australia and Macau as well as expansion in the North American adjacent markets, with the Canada and Oregon VLT, Georgia COAM and HHR markets. Importantly, our global gaming presence is on full display as international unit shipments increased 33% to over 5,500 units with North America up 16% year-over-year to over 5,800 units. Global average selling price also increased 6% to over $18,500 compared to prior year. Systems revenue in the quarter increased 14% year-over-year, primarily on strong hardware upgrade sales to existing customers and expansion of our software offering to an operator partner in Asia. Lastly, Table products revenue was impacted due to timing of elevated utility sales in the prior year. Overall, I am pleased with the operational excellence from the team as we continue to achieve and exceed our KPI and financial milestones underpinned by the breadth and depth of our product portfolio and our global scale. Turning to SciPlay, where we saw continued performance as the team once again delivered above-market growth while executing on key growth initiatives. Revenue increased 8% year-over-year to $205 million, driven by continued growth in our 4 largest social casino games. In addition to top line growth and disciplined user acquisition spend, which I will note is typically lower during the second quarter of the year, our direct-to-consumer platform generated $24 million or approximately 12% of SciPlay's revenue in the quarter which drove a 19% year-over-year increase in AEBITDA to $70 million with AEBITDA margin up 300 basis points to 34%. We continue to deliver strong monetization metrics across the board with average revenue per daily active user of $1.04 in the quarter a 12% increase year-over-year and average monthly revenue per paying user approaching $117, a 15% increase over prior year period. Both record highs as we continue to bring the best gaming experience to our players through our portfolio of games. That said, we see the opportunity to potentially lean into high-return marketing initiatives in the second half of the year as we further invest and refine our user acquisition, engagement and monetization flywheel. We will continue to invest in UA spend as needed and reassess if we are not seeing the returns above our thresholds. Looking ahead, we expect an incremental investment of up to $6 million in the back half of the year, which could subsequently impact our average revenue per daily active users on newly introduced daily active users starting in the third quarter as we further expand the ecosystem and drive longer-term monetization returns. Our team is one of the best at deploying capital efficiently as demonstrated over the past 2 years, leading to the outperformance you see quarter after quarter. Additionally, we expect to deploy a prudent direct-to-consumer strategy going forward in the near term, which will ultimately scale our offering more meaningfully in the long run. The track record and level of execution at SciPlay gives me confidence in the team to grow the business sustainably, leveraging our robust suite of games franchises as we further invest back into the business. On to iGaming, where we maintained record revenue of $74 million, up 6%, driven by strong growth in the North American market and engaging content launches. AEBITDA was $24 million in the quarter with AEBITDA margin of 32%, reflecting continued investment to scale the business. As a reminder, prior year quarter benefited from $2 million in license termination fees, which impacted revenue and AEBITDA growth by 3% and 9%, respectively. Additionally, we had termination fees of $3 million and $1 million in the third and fourth quarter, respectively, last year. Our underlying business remains healthy with strong franchises and new game performance. Additionally, we saw record GGR quarters across the board with our acquired studios and platforms. Lightning Box delivered a record quarter on 33% GGR growth compared to prior year supported by strong launches from the Thundering series. Elk also maintained record GGR levels, up 17% year-over-year, anchored by the Pirates franchise, which is being released across the network in the third quarter. Playzido also generated record GGR in the quarter, driving more collaboration and content on the platform. The scale and experience we have with our platform and network, along with a portfolio of expanded offerings position us well to capitalize on the opportunities ahead of us. Light & Wonder's overall success is underpinned by fundamentally sound execution on the solid financial foundation we've established over the last 2 years. As our business scales, we also expect associated corporate costs to increase while maintaining our healthy margins throughout the organization through continuous margin enhancement assessments. Given our continued growth, we now expect second half corporate costs in the $40 million range per quarter. Fortunately, our strong balance sheet remains a key competitive advantage in this environment, enabling further disciplined R&D investments and meaningful capital deployment. Importantly, we are focused on preserving an optimal capital structure. Just recently, we repriced our Term Loan B, reducing our interest rate by 50 basis points, resulting in a decrease in annualized interest cost of approximately $11 million or $19 million in annualized interest cost reduction, including our January repricing. At quarter end, we had over $1 billion of available liquidity, including over $320 million of cash on hand. Consolidated operating cash flow was $141 million in the quarter, with free cash flow increasing 192% to $70 million compared to prior year reflective of strong earnings and the prior year period impact of the strategic review and related costs, partially offset by an increase in capital expenditures. With the strong performance and demand of our games and upcoming gaming operations road map, we expect elevated capital expenditures to continue in the coming quarters. These are critical investments to build the business over time as we continue to invest for sustainable growth. We are firm believers that free cash flow is one of the key drivers of shareholder value with our highly castratative nature of our business and continuous efforts to improve conversion rates, both of which will allow us to further scale annual cash flow over time. On to capital allocation. Our focus largely remains the same within a balanced and opportunistic framework. We continue to be in the middle of our targeted net debt leverage ratio range of 2.5 to 3.5x, ending at 3x in the quarter. demonstrating our ability to delever organically, which was offset by elevated share buybacks in the quarter. As Matt mentioned earlier, we implemented a new 3-year $1 billion share repurchase program immediately after we exhausted the initial $750 million buyback authorization at an average price of $66.72 per share as we bought back the $150 million left on the plan in the quarter. We will continue to reinvest back into the business through R&D and CapEx, leveraging our core capabilities to enhance sustainable growth and bolster our industry leadership positions. With regards to M&A, we will continue to take a disciplined approach to the extent that these opportunities are accretive and exceed our return thresholds. With our strong growth profile, scaling free cash flow conversion and share repurchase program, we expect to see meaningful growth in free cash flow per share going forward. Overall, we have an effective capital management strategy, and we will continue to deploy capital with an approach that maximizes value for shareholders within the context of a healthy balance sheet. In closing, I'd like to thank the team for their continued hard work and dedication as we scale this business for long-term value accretion through our sustainable growth strategy and product road map. With that, we will turn it over to the operator for your questions.

[Operator Instructions] Our first question is from Barry Jonas with Truist

Multiple competitors are obviously in the midst of M&A. Just curious how you see that impacting the market and your positioning?

Barry, yes, I think our position is great. At the moment, you can see we had a fantastic second quarter, great results delivered by the teams across all the 3 operating businesses. So we're very well positioned. Yes, it's a very interesting time in the market at the moment with M&A activity certainly ticking up. I think it's a function of rates stabilizing and deals getting easier to price. So I want to congratulate AGS, IGT and every -- all getting their transactions away. So congratulations to the CEO of those companies. Interestingly, they've all been taken private, which I think is driven by the fact that these private equity companies are looking for businesses that are resilient, stable and cash generative. And clearly, that's what they see in the sector. So I think it's a good halo effect for the supply side of the industry. These types of acquisitions do come with a level of disruption as you go through integration. That's a lived experience for the Valley team, the WMS team, the Signet and the Light & Wonder team. We've been through a huge amount of M&A and divestitures ourselves. I guess, the benefit that we have as an organization is we're on the other side of those things now. So clearly, we have a defined strategy. We have clear goals that are outlined. We've got great operating momentum. So for our organization, it's really just stay focused on executing towards our goals. And clearly, you can see in the quarter, they've done that exceptionally well. So it could present some near-term opportunities as we kind of work through the process of those integrations, but we stay focused on controlling the controllables.

Our next question is from Rohan Gallagher with Jarden.

Oliver. Firstly, congratulations on another good result. The last 2 years, we've seen greater R&D focus that's led to broader and deeper game and cabinet portfolio, including proprietary licensed titles. It's obviously provided momentum for you to push successfully into things like adjacencies, et cetera. Can I ask, Matt, how you see the portfolio currently? And what should we expect in terms of new games, cabinet releases, et cetera, to maintain that momentum on your -- towards your targeted $1.4 billion adjusted AEBITDA, please?

Sure. Looking forward to seeing you next week, Rohan. Yes, I think the way you explained it is the right way to think about it, don't think about a game or the next cabinet that's being released. Think about the program that's being set up here by Rich Schneider and Nathan Drane and the entire R&D organization. We've made huge amounts of investment putting infrastructure in place so we can build a portfolio that delivers great hit games after great hit games. And you're seeing a lot of momentum in the ILS chart. I think you can see Huff N’ Even More Puff the #1 core game in the market doing very well. Obviously, you can see Dragon Train performing well in Australia and the U.S. But it's a range of games. I think one of the interesting data points that we've seen recently is the second quarter ILS spot survey. You can see 3 of the top 4 most anticipated games in that survey were Light & Wonder games. So that really points to kind of future purchase intentions. And so the 3 games were Huff N’ Even More Puff plus Money Mansions, Squid Game and Dragon Train. So Squid Game just launched actually last week at Yaamava so a shout out to them as being a fantastic launch partner. But we've got great momentum across the board. And really those games that we're building will ultimately end up on casino floors in North America and globally. But those same games will go into the adjacent markets. Those same games, again, will go into the SciPlay business and also iGaming. So to the extent that we're building world-class games, it just rises all boats across our organization. So really comfortable with the momentum we're seeing you're seeing it on the ILS chart, you're also seeing a show up in the financials. So we're in a good spot.

Yes. And just one thing to add to that is, obviously, content is king, but we're also coming out with really great hardware cabinets as well. So Horizon Cabinet coming up with Dancing Drums Ultimate Explosion with the Landmark 7000 Transparent coming off the heels of a very successful Landmark 7000 mechanical reel cabinet. So we've got kind of a combination of both software and hardware to be able to commercialize and really drive sustainable growth in the future.

And if I may be cheeky, could I ask OC just -- I noticed higher restructuring costs, legal costs, et cetera. Obviously, that impacts your EPS ultimately. Can you unpack that in terms of what that was and what we should expect going forward, please?

Yes. So from a corporate perspective, we've talked about a couple of things in the call. As we mentioned, as we continue to kind of grow this business over time, we will -- we should expect to see roughly, call it about a $40 million run rate from a corporate perspective as we continue to kind of scale at a pace much lower than revenue. And we want to make sure that we can sustain that and then be able to sustain and support that growth level across the businesses. We did not spend the full $10 million that we had discussed from a legal perspective in the first half, and that's something that we discussed late last year. Some of that will now start to flow into the second half. So moving forward, like many gaming companies, we would expect to have some level of ongoing legal expenses as we move forward. So we'll continue to kind of manage that broadly speaking.

Our next question is from David Katz with Jefferies.

Good day, everyone. Good afternoon, everyone. A couple of cash and capital questions. Firstly, with respect to the repurchases. Just an update on your philosophy and thinking about when and how much dialing that up and down, whether it becomes a programmatic aspect of the business and the like. And then my second question is, just looking back over the past 6 quarters, and the cash from ops conversion from AEBITDA, it's really jumped around quite a bit. It was definitely up in this quarter year-over-year. But part of the question is, should we think about the back half of the year as higher conversion as it was last year? And any color on that will help.

Thanks, David. Good to hear from you. So yes, to your first question on share repo, we've executed our capital allocation strategy and framework really well over the last couple of years. And a lot of that is just trying to stay consistent with really no structural change to our framework as we move forward right now. Obviously, we'll remain nimble as we go. With the strong momentum that we're seeing across the business and really sitting in the middle of our kind of leverage range, we have significant optionality and flexibility with regards to how we deploy capital. And so if you think about the last 2 years, we've been able to delever while executing on that share repurchase program at an average price of about $66.72. So we continue to drive significant value creation for our stakeholders. And like I said, we'll continue to deliver organically as we continue to have very strong top line but really the quality of earnings down to AEBITDA growth as well as the cash conversion that you mentioned continuing to scale here over time. So yes, share buybacks will continue to be a key focus for us and to your point, we do have a very programmatic plan now in place that we kind of highlighted late last quarter. And at times, we'll look to lean in and take advantage of opportunities or dislocations in the marketplace with this new $1 billion plan in place. So with our leverage kind of where it's at right now, we're focused on investing in growth and really enhancing the long-term value of our stakeholders with just the optionality available to us to kind of grow free cash flow. So we're in a great position, broadly speaking. To kind of hit your free cash flow question, the highly cash driven nature of our businesses really does give us kind of confidence kind of executing to our kind of base strategy. Overall, we do manage free cash flow well kind of from a quarter perspective, just given some of the seasonality that we see. So timing of CapEx, interest payments and tax payments. So there's obviously a lot of moving parts that kind of move quarter-to-quarter. That's why we kind of focus solely on kind of an annual view on free cash flow. But as we continue to scale, Matt mentioned the inflection point from an installed base perspective, we're going to continue to invest in CapEx. So that's going to be a key driver for us to grow the business over time, especially in that premium installed base, where we expect to continue to deploy CapEx to support this growth over time. But we had a great year, a great quarter, I should say. Just kind of growth-wise, it's 188% versus prior year to $70 million, and that's reflective of obviously, of the strong earnings that we talked about, but also cash -- the enhanced cash conversion, but the onetime items that we had in last year. So this is a key focus for us here at Light & Wonder. Matt and I are confident that we're going to continue to scale free cash flow here over the long term.

Our next question is from Chad Beynon with Macquarie.

Matt and Oliver, I wanted to ask about SciPlay. In the prepared remarks, you mentioned that direct-to-consumer is up to 12%. You continue to take share and then the margins are increasing because of that initiative. So how do you see this continuing to ramp into the back half and beyond? And then secondarily, there's been a sweepstakes business that continues to increase. And I think some of us view it as a partial competitor to social, maybe a partial competitor to iCasino. Do you see that as a bigger threat to your SciPlay business?

Yes, just quickly another great quarter from SciPlay. The investments we made in the SciPlay engine a few years ago are continuing to pay dividends. We've seen good growth across all of the major games. So good operating momentum, a great team that's back fully aligned to Light & Wonder. I think direct-to-consumer was a key feature of this quarter. We went from 1% of revenues in 2023 being driven through our direct-to-consumer platform to 12% in the quarter. So there's been a huge step up sequentially Q1 to Q2. We've rolled it out over the lion's share of games now, I would say. And so we see levels probably normalizing a little bit from this point going forward through the remainder of the year as we kind of assess the player reaction to that. We're really comfortable with what it's delivering to us from a bottom line perspective. And we'll continue to scale over time, but I think that big run-up in terms of the exponential growth in DTC will normalize in the back half, but it's making a big contribution. To the sweepstakes question, it's interesting market landscape, a lot of activity from a legal perspective around sweepstakes in different states. And it is an online form of playing slot style games. So it certainly does play into the same profit pool I would suggest. So we're watching it closely as an emerging category, not something we intend on participating in given the highly regulatory nature of that business, but it's something we watch and monitor very closely.

We have a question from Rohan Sundram with MST Marquee.

Just one for me around the $1.4 billion AEBITDA target for next year. How -- can you just as a reminder of your confidence on that target? And just whether anything has changed, how are you seeing any specific headwinds or tailwinds around that? That would be great.

Yes. Great. also looking forward to seeing you next week at AGE Yes. Just for memory's sake, if you go back through the algebra of this target that we laid out, we set it out in '22. We delivered $913 million of AEBITDA that year, and we put this ambitious goal to get to $1.4 billion by 2025. At this time it is 15% CAGR to get us from where we were to the goal, which was above category growth and what looks like a very ambitious goal for an organization just kind of coming out of its transformation. 2023, we delivered 22% AEBITDA growth against that 15% run rate required. If you think about this last quarter, Q2 was 17%. So that leaves us -- and this is the arithmetic of it, 11% run rate required to use the Cricket terminology to get us to the goal. So feeling like we've done a lot of the heavy lifting to build the operating momentum to put us on the right trajectory to get towards that $1.4 billion by 2025. We feel very confident we can get there. And it's really the mix of the businesses and the performance we're seeing across the broad organization. And really, kind of the fruits of the investments we've made in things like the SciPlay engine, the R&D organization, the infrastructure we put into the iGaming business gives us a lot of confidence in the pathways to get there. So I think the operating momentum we see there's a clear path to that to get to that $1.4 billion. And then really, it's beyond that, where do we go from here as an organization, which obviously is a key question for investors. What we'll say is that there's no earnings cliff in 2025. We've set these businesses up in a way that they'll grow in perpetuity. So we see great runway to get to that $1.4 billion and continued momentum beyond that. And we'll come back to investors in due course to kind of frame up how best to think about the opportunity beyond 2025. But we've built a great business that has great momentum, and we don't see that falling away anytime soon.

Our next question is from Ryan Sigdahl with Craig Hallum.

Matt, Oliver. Matt, looking at Asia and kind of international, but strong showing at G2E in Asia in June, looking at international shipments, another 30-plus percent quarter this quarter. I know a lot of success in Australia and Macau and the Entain deal in U.K. is certainly a nice one. But what's next? I guess, are there other geographic opportunities on the strategic road map to keep the momentum going and growth in future years? And then secondly, just a quick one for Oliver. You mentioned kind of a lot of puts and takes in the second half in Q3. Are you willing to comment directionally if you expect EBITDA margin to be up in 2 half versus 1 half.

I mean, the Asian market is something that's really close to my heart. I actually lived in that region for 5 years back in the 2008 time frame. And that was when that market was really booming at that point in time. It was the slowest market to recover out of COVID. It's really nice to see it back in full stride. What's growing in our business at the moment is really those traditional Asian markets, so Singapore, Macau, the Philippines, a lot of activity in that space. So feeling really good about the opportunities in front of us for those markets, and that will be a multiyear opportunity. The things beyond that, you see the UAE emerging as a potential market. We think the Wynn property likely comes online in 2027. Beyond that, you see Thailand emerging as an opportunity probably in the '28-'29 time frame. You've got Japan, looming as a new gaming market. So really a lot of optionality for us across that international business. And I think it speaks to the strength of our organization. As a CEO of the company, you want a diversified portfolio of businesses. We have that across the 3 operating businesses. We have it speaking specifically to gaming, very diversified across that gaming footprint, across games and tables and systems, but also geographic markets. Australia has emerged as a really great contributor to our organization. Number 1 share again in the quarter, which is just a fantastic recognition of all the hard work that's gone into building our position in that market. We're a #1 player in Asia, we've got a really healthy U.K. business. I think the Entain deal that you referenced 4,000 units going into that market in Q3. We're just a diversified business with lots of areas that can contribute to the growth of the organization. I think that's thing about Asia, the traditional markets today, Singapore, Macau, Philippines, and then a broader set of opportunities over the coming years across the UAE, Japan. And so yes, and maybe to you, Oliver, in terms of hitting these questions.

Yes. Just at a high level, we obviously executed really well here in the first half. In the first half we had a 15% AEBITDA growth relative to prior year. To Matt's point earlier, that requires about 11% to kind of get to our kind of ultimate 2025 target. So as we kind of look through each business unit, we do see quite a bit of runway for us to continue to drive growth into the second half as well as the early part of 2020 -- 2025. So at this point, I think from us, we know exactly what we need to do to be able to execute in gaming. So we talked about the Entain deal. I think that's a great piece of business. That not only gives us AEBITDA here in the third quarter, but also gives us a long tail recurring revenue over time. We'll continue to meaningfully increment our gaming operations installed base, continue to drive units into our adjacent markets. In SciPlay, we're going to continue to focus on the SciPlay engine that Matt mentioned earlier and the UA opportunities that are available to us to continue to drive our monetization metrics in the back half. And so broadly speaking, on top of all of that, we'll continue to kind of focus on margin enhancement and operational excellence. That's going to help us bolster again, either margins at the bottom line, taking it to the bottom line or giving us optionality to reinvest that back into the core so that we can drive sustainable growth over time. So Yes, we still see quite a bit of runway here in the second half and obviously, as we head into 2025.

We have a question from Annabel Li with Goldman.

Very strong North America unit shipments to 5,800 in the quarter and looks like this was primarily due to adjacencies. Can you provide more color on where the opportunity might be standing out? Any future potential markets and how we should think about this into FY '25?

Yes. Great. Thanks for your question. Yes, Kudos to the gaming team driving that level of game sales in the quarter. I thought it was an exceptional feature of the result. Yes, it was a combination. This goes back to this idea of diversification. We've got a large Class III replacement business, but we also have this nice diversity across the adjacent markets. This is really the fruits of investments we made about 2 years ago in content and platform and technology to get us into these adjacent categories. I think probably the biggest success we've had was with the Oregon lottery. So we announced that last year. We've been rolling those games out sequentially quarter after quarter. The game has performed so well, in fact, that we've got a reorder in Oregon, another 1,200 units. So that's really exciting, speaks to the quality of the content that we're rolling out across Oregon. We've shipped games into Quebec now another VLT market. There's a few other Canadian VLT markets that we're addressing we'll make some announcements about soon. We've unlocked the Georgia COAM market, got some great momentum there as well. So it's a broad spectrum of markets, historical horse racing as well as making a contribution, Class II. So again, it speaks to the diversity of product categories. We're in the very early innings as we look out into the order book across the coming quarters, there's further opportunities in adjacencies and just really nicely hedges our sales book across core Class III replacements across adjacencies across international markets. So again, as a CEO, great to have diverse order book and contributions coming from all corners of the globe. It's a good spot to be.

Our next question is from Jeff Stantial with Stifel.

Just one for us on the game ops side of the business. Specifically, it's notable to us that the broader North America TAM continues to grow sequentially alongside the product momentum that you highlighted earlier in the call, just given that we were all fairly used to for a while, seeing steady contraction for really the better part of a decade and a half heading into the COVID shutdown. Matt and Oliver, I'd love just to get your perspective on what you think is driving the structural expansion and lease mix on North American casino floors and along the same lines, maybe how you see this playing out looking out over the next several years?

I think it's a great observation. And like we called in last quarter, the second quarter was an inflection point for us, a huge step up in terms of net adds, over 1,000 units placed. So that's really encouraging. And the gaming off business pays dividends over a very long time horizon, so kudos again to the team for driving that level of increased net adds as a key feature of the result. Yes, we see a structural expansion in the number of premium gaming ops units in the market since COVID. I think there's a number of factors that contribute to that. One of the big ones from a narrative perspective, is coming out of COVID, if you remember, the casinos when they reopened, they shut down all their amenities. They shut down their buffets, their entertainment, their F&B outlets. And what was left was this core nucleus of the business really driven by the games and the casino floor and the margins that were generated from that from an operator perspective were exceptional. So I think it really shined a light back on the fact that the games, the slot machines on casino floors are really the economic engine of this industry. And so there has been an acute focus on the best games. And so I think operators also know that their best players generate a lot of their profits. And so the best players want to play the best games and so I think giving access to players for those best games is something they've been really acutely aware of. So adding more premium lease games has been a consequence of that. I think also the supply side of the industry, us and others are spending a lot of R&D dollars premiumizing our great franchises, things like Huff N’ Even More Puff is a great example of that or Squid Games, Dragon train. They're really putting a lot of effort, putting our great game designers to work, building games in this category. So it naturally drives demand. And again, the best players want to play the best games, and I think that's been the focus of the operators. That's our explanation for why the market has been expanding.

We have a question from Justin Barratt with CLSA.

Look, I think there's been a lot of focus on your growth trajectory out to 2025. But I wanted to ask a little bit more about growth thereafter? And how do you see growth playing out thereafter? And then second of all, I just wanted to ask specifically about iGaming, your investment there, you continued investment there in order to grow the business long term and what that should mean for margins in the near term

Yes, I think it's a fair question, and we have been fixated on the $1.4 billion. It was a number that seemed very ambitious just a few years ago and now you can see the forecast kind of catching up to that level of ambition. We're making significant investments that will fuel growth beyond 2025. I guess a really good example, a practical example of that is the investment in the new studio around Kelsy Foster up in Reno. Kelsy starts later this year. She was one of IGT's biggest producing studios. She will build a range of games that will hit the market late in '25, early in '26. So making investments that pay over that time horizon beyond 2025. And so really setting this business up for success in perpetuity. We think we're still in the early stages. We have relatively low share positions in the majority of our markets, so we can continue to take share in a market that is looking for great gains, and that's what we focus on. To your point about iGaming, if we go back to 2022, there's no false precision about the $1.4 billion. The mix of contribution across our businesses is slightly different than what we had anticipated back in 2022. I think at that point in time industry pundits, analysts forecasted a rate of expansion across iGaming that hasn't actually eventuated to this point. So we've seen a bit of a slowing in legalization. The good news is we still believe that, that is going to happen. It will likely happen on the other side of 2025. So that kind of hyper growth optionality that iGaming presents for us is great growth opportunity for us in the years beyond 2025. So our job now is to really position our iGaming business to be the leader in slots, which it is now, and ready to capture as much share as possible in those markets as they come online. So we'll guide the market more specifically over time. We've got the guidance out to $1.4 billion in 2025. We'll come back at some point in the future and reframe that. But I will say from my vantage point, these businesses have been set up in a way that growth is perpetual. There's opportunities across all 3 businesses, specifically iGaming, we think will come online in a more material way beyond that time horizon of 2025.

Our next question is from Andre Fromyhr here with UBS.

Just wanted to ask what you're seeing in terms of the health of the U.S. consumer and the sort of playing behavior, maybe an outlook for that? And expanding on that, how you think that might be shaping the operators' willingness to invest in either replacement or growth at the moment?

Yes. We're living in a very volatile news cycle. No doubt about that, earlier this week was a great example of that. But I'm reminded that the macro, the markets, it's not the gaming industry. It's not the end markets that we operate in. And so the specific areas that we're focused on you look at GGR numbers, they're looking very healthy. They're significantly above 2019, which is the pre-COVID era. You're seeing GGR levels being held on to by operators. So we feel like the outlook is still in very good shape. I think it speaks to kind of the natural resilience of our end markets. Gaming has proven to be a powerhouse that can operate through the cycles. And so we're looking into the order book. We're not seeing any deterioration in the forward-looking funnel. You're looking at our gaming ops installed base. You can see our RPDs are up year-on-year. If you look at the SciPlay numbers, ARPUs up. So all the lead indicators that we have that are specific to our sector are green. And so we're in growth mode. We watch it with a healthy level of paranoia, but if you go back through the cycles, gaming is an industry that is resilient and they can power through the cycles. And we're going to continue to invest. And if we're hit with a massive macro shock wave, we know the levers to pull to navigate through that. But at the moment, our end markets look healthy. We're taking share. We're building great games. We're doing all the things that great companies do. And again, we'll continue to look at that and monitor it, but I think the setup is pretty opportunistic for us at the matter.

Our next question is from Sriharsh Singh with Bank of America.

Matt, Oliver, just shifting focus to Australia. A quick question from my side. How do you plan to defend your #1 market position in Australia now going forward? And with respect to that, what are some of the games that you've commercialized beyond Dragon Train in the last few months? And what's your plan for AGE? Should we expect some big launches there?

Great question, AGE is obviously, next week, I'm on a plane tonight to Sydney to be part of that. It's an exciting time to be a part of that Australian business. If you go back a year, we did an investor presentation at AGE, we talked about Dragontrain. We talked about the investment in Australia. Subsequently, we've gone to #1 in that market. If you go back to we had no false precision about how we'd get to the $1.4 billion. We had ambition for the Australian business. We didn't really expect we'd be in the #1 position in that market so quickly. So again, testament to what great games can deliver Dragontrain has been a huge feature of the result in Australia. I've said publicly, that's a multiyear story. These types of games have a very long tail on them. If you look at the penetration rates across the key markets in Australia. We've got a lot of runway to execute that game. Importantly, games 5 and 6 were approved overnight. So we go into the AG show I'll be with games 5 and 6 of Dragon train ready to sell, we'll be taking orders down there. So that will be just another kind of wind in our sail as we continue to execute in Australia. But beyond that, we're making huge investments to be a #1 supplier down there. We've got Jewel of the Dragon. Again, we built for the U.S. market that we've taken to Australia. It's doing very well on the charts early days, but we see great opportunity there. We've got Shenlong Unleased, a great game out of a great young game designer, Jack down there in Australia. He did Dragon Unleased, which really was one of the first games to build the momentum that we had in the Australian market. So we take that game. We've built some learnings into it. We launched that at AGE. That's also approved. So it's really a broad and deep portfolio of games. And we got to this #1 share position in the market, and we like it. We want to stay there, so we're investing appropriately. But back to the idea of this business is set up in a really unique way, that we build great games for a market like Australia we take them to the U.S., we deploy them in gaming ops like we have with Dragon Train. We then take those games, deploy them into SciPlay. We take those games and build them into the iGaming platform. So every dollar of investment we push through the R&D engine, we can sweat those assets across a range of businesses that really fit together. So you're feeling good about the lineup for AGE next week. It's going to be exciting to be with the team down there. They've done a lot of work to get us into the #1 position. We want to make sure we hold on to that.

I'd now like to hand the call back to Matt for any closing remarks.

Thank you. This quarter marks our 1-year anniversary on the ASX. I am also pleased to announce that we were added to the Russell 1000 Index in late June, reflecting our continued momentum and market confidence in Light & Wonder. I'm very proud of what we've accomplished along the way and the recognition of our strong performance with the index inclusion on both exchanges. Thank you again for your continued support. On behalf of everyone on the Light & Wonder team, we look forward to achieving additional milestones and creating greater value for all of our stakeholders. Thank you, and have a great rest of your day.

That concludes today's call. Thank you all for your participation. You may now disconnect your line.