Light & Wonder Inc (LNW) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the Scientific Games First Quarter 2017 Investor Conference Call.

(Operator Instructions) Please also note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Bill Pfund, head of Investor Relations.

Sir, please go ahead.

Thank you, Jamie.

Good afternoon, everyone.

During today's call, we will discuss our 2017 first quarter results and operating performance, followed by a question-and-answer period.

With me this afternoon are Kevin Sheehan, Chief Executive Officer; KJ Tjon, Chief Operating Officer; and Mike Quartieri, Chief Financial Officer.

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 earnings release issued today, the materials relating to this call posted on our website and our filings with the SEC, including our most recent Annual Report on Form 10-K filed on March 3, 2017, as well as subsequent reports filed with the SEC.

We will also discuss certain non-GAAP financial measures this afternoon.

A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure can be found in our earnings press release, as well as on our website.

As a reminder, this conference call is being recorded, and a replay of this webcast and the accompanying materials will be archived in the Investors section at scientificgames.com.

Now, let me turn the call over to Kevin.

Thanks, Bill, and good afternoon, everyone, and thanks for joining us.

Our first quarter results mark the sixth consecutive quarter of year-over-year increases in both revenue and attributable EBITDA.

Revenue grew 6% to $725 million.

On a constant currency basis, revenue would have been up nearly 8%.

Our attributable EBITDA increased 11% to $287 million, reflecting the higher revenue and 160 basis point improvement in our margin.

Our margin benefited from the actions we took in the fourth quarter to streamline our organizational structure.

This is a great start to the year.

All three of our operating business segments contributed to the revenue and earnings growth.

Our success is rooted in the efforts of our entire team pulling together, and I'd like to give my compliments to all of our Scientific Games employees around the globe.

I believe we are starting to see some real momentum across our businesses.

In our Gaming Business, sales of gaming machines provided a strong boost to our results.

Global unit shipments were up 24% over the prior year.

Table products also turned into an exceptional performance.

Revenue was up 16%, reflecting both solid organic growth in leased revenue from our shufflers, proprietary table games and other table products, coupled with the addition of the DEQ acquisition.

DEQ's products are a smart, complementary tuck-in into our existing table games business.

The acquisition was completed on January 18, with cash from our operating cash flow and was quickly integrated.

Our Lottery business generated revenue and attributable EBITDA growth despite having a tough comparison with last year due to the incremental sales associated with the $1.6 billion Powerball jackpot.

Our Instant Games business experienced a revenue gain of nearly 5% in the first quarter, driven by our ongoing efforts to help lotteries grow their market and an increase in licensed game products.

And finally, but certainly not in the least, our interactive division continues to shine.

Its results were driven by strong growth in our social gaming B2C business.

Our strategy of leveraging our existing library of game content and intellectual property continues to delever rapid top line growth -- deliver rapid top line growth, excuse me.

Revenue growth exceeded the industry average on a year-over-year basis and reflects both share gains and market expansion in a healthy growing industry.

Complementing the strong organic growth of the social casino business on April 7, we completed the acquisition of Spicerack Media.

The founders of Spicerack developed what has become the #4 social Bingo app, the popular Bingo Showdown mobile game.

The addition of a social bingo app is highly complementary to our existing game portfolio.

Bingo games have an attractive player profile and financial characteristics and the acquisition will be immediately accretive to our earnings.

Joining us today for her first call is KJ, our Chief Operating Officer.

KJ, would you please review the performance of the gaming and lottery segments?

Thanks, Kevin.

Good afternoon, everyone.

Our Gaming business generated an $18 million increase in revenue over the prior year despite a $5 million of unfavorable foreign exchange impact.

Segment AEBITDA also increased by $18 million, primarily due to the impact from higher revenue, coupled with lower SG&A expense that resulted from the organizational streamlining in the fourth quarter.

The AEBITDA margin of 47.7% was a 240 basis point improvement over the prior year quarter.

As Kevin mentioned, a key element of the revenue growth in gaming was a 24% increase in global unit shipments of gaming machines.

During the first quarter, we shipped 8,359 new gaming machines globally, compared with 6,748 units in the prior year.

In the U.S. and Canada, we shipped 5,862 units including 3,139 replacement units, 250 VLTs to Oregon; 861 CGPs to Illinois and 1,862 units for new casino openings and expansion.

The demand from new casino openings included shipments for the ilani tribal casino in Washington, where we received a 57% share of the shop -- the slot floor, including participation units.

In addition, we shipped units to the new Kansas Crossing Casino and some other casino expansions.

The higher shipments reflected strong sales of both the Pro Wave cabinet and the expanded TwinStar family of gaming machines.

Reflecting a favorable mix, our average sales price rose to $17,015 from $16,719 a year ago.

In gaming operations, the revenue was down 7% year-over-year and flat on a quarterly sequential basis.

On a quarterly sequential basis, our footprint of WAP and premium units declined 322 units, but that impact was offset by 3% increase in the average daily revenue of $1.73 per unit.

The increase in the daily revenue was largely due to the continued installation of high-performing Gamescape units in our footprint, coupled with the seasonal improvement.

The success of our Gamescape cabinet featuring the WILLY WONKA WORLD OF WONKA content continues to generate exceptional player engagement in its initial installation.

We will follow the success of WILLY WONKA with the highly anticipated launch of THE SIMPSONS game near the end of the second quarter.

Additionally, the development of the new fully digitized PRIZM game table remains on track, and we expect to launch this innovative product in the second half of the year.

The footprint of other participation in leased units was essentially flat on a quarterly sequential basis.

An increase from the installation of VLTs in Greece was offset by the removal of some lower-performing units in other markets.

In Greece, based on the expected rollout plan communicated by OPAP, we expect to have our full complement of 5,000 units installed by mid-year 2018, with the majority of the units installed by year-end 2017.

Gaming systems revenue of $62 million was up from $60 million in the prior year quarter, reflecting slightly higher hardware sales.

We have begun to see increased traction on our new innovative iVIEW4 display, which provides a dramatic revolution in player engagement for our systems customers.

As Kevin noted, table products revenue rose 16% year-over-year, primarily due to an increase in the lease revenue from shufflers, proprietary table games and other table products.

The total installed base of proprietary table games progresses and shufflers continue to expand year-over-year on a quarterly -- on a quarter sequential basis, reflecting both organic growth from the introduction of our new products such as the ShuffleStar continuous shuffler, along with the benefit of the DEQ acquisition.

Turning to lottery.

Our revenue increased $1 million inclusive of an unfavorable $2 million foreign currency translation.

First quarter lottery results had a tough comparison to the prior year, where in the first quarter of 2016, it included about $5 million of incremental benefit from the $1.6 billion Powerball jackpot.

Lottery segment AEBITDA increased $4 million or 5% compared to the prior year quarter, largely due to the impact of the higher revenue, lower SG&A expense, resulting from lower payroll and associated costs and a slight increase in EBITDA from our joint ventures.

Looking a bit closer at revenue.

Instant games revenue increased $6 million or nearly 5% over the prior year, primarily reflecting an increase in revenue from sales of licensed games, along with a higher revenue from price per unit contracts, reflecting the timing of new game launches.

Year-over-year, services revenue decreased, primarily reflecting the tough comparison with last year's first quarter results, which had benefited from the large Powerball jackpot.

The addition of the Arizona systems contract essentially offset the impact from the expiration of the Indiana terminal services transition agreement.

Now let me turn the call over to Mike.

Thanks, KJ.

Good afternoon, everyone.

Continuing on from gaming and lottery.

Our Interactive segment had another great quarter.

Revenue was up 33% year-over-year to $96 million and our growth, once again, exceeded the industry norm on a year-over-year basis.

As a result of the strong revenue growth, operating income increased $6 million and AEBITDA rose nearly $8 million or 49%, compared to the prior year period.

The AEBITDA margin increased to 23.9%.

While the margin improved, it's important to recognize that our interactive business is at an early stage of development and growth.

Our original social casino apps, Jackpot Party and Gold Fish, continue to provide double-digit growth, and we've expanded our offering with the addition of new casino apps.

Leveraging our extensive library of gaming IP and game content, each of these new apps provides differentiation, and therefore, creates the opportunity to appeal to a broader market and grow our paying customer base.

The marketing support to create awareness, the player acquisition cost to build the player base and the prelaunch development investment are the primary drivers behind the increase in SG&A expense in the period.

Our interactive B2B business, which includes our game content for real-money gaming and our SG Universe Social Solution, also increased in the quarter.

Revenue grew 30% over the prior year period despite the unfavorable impact of about $1 million of foreign currency exchange.

At the corporate level, operating expense increased as the benefit from lower payroll cost was offset by higher legal costs.

Now turning to cash flow and the balance sheet.

Operating cash flow increased $10 million to $111 million, which included $13 million of cash payments related to the business improvement initiatives we implemented in the fourth quarter.

Changes in working capital contributed $7 million to cash flow compared to $19 million in the prior year period.

Free cash flow was essentially flat year-over-year as the $10 million increase in operating cash flow was largely offset by a $10 million increase in capital expenditures.

Midway through the first quarter, we completed a very successful refinancing.

Since we've previously discussed this, I won't rehash it in detail.

In summary, as a result of the refinancing transactions, we lowered our cash interest, reduced our exposure to variable interest rates, extended our maturities and paid off the $45 million outstanding balance on the revolving credit facility.

Given the refinancing occurred midway through the quarter, our interest expense for the period reflected about half of the benefit.

We recorded a $29.7 million charge for the extinguishment and modification of debt related to the refinancing transactions.

During the quarter, we also completed the $21.5 million acquisition of DEQ, which was funded from operating cash flow, and we incurred about $3 million of acquisition-related expense, included in restructuring and other, which was an add back to AEBITDA.

Cash and cash equivalents increased by $17 million during the first quarter.

In early April, we used available cash on hand to fund the acquisition of Spicerack Media, into our Interactive business, which is immediately accretive to our earnings and operating cash flow.

Going forward, our primary goal remains to create operating improvements and opportunities that will enable us to further reduce leverage.

And now, I'd like to open up the call for questions, operator.

(Operator Instructions) And our first question today comes from Barry Jonas from Bank of America.

Just a couple for me.

Kevin, is there still room to cut cost out of the business?

Or is your focus now really more on driving the top line?

I think we have to be measured, but there's still a solid opportunity as we get through quarter-by-quarter.

This is something that I think is going to be not big amounts in any particular point in time but just operational excellence and scale benefits as we get moving.

There should be accretive benefits every quarter.

Great.

And then you guys have been exploring ways to monetize your interactive business since, I think, September.

Just wondering where you are in that process?

And maybe some general thoughts about the DoubleDown sale.

Yes, I'm not sure we're actually -- we're not looking to do anything aggressively at all.

We have a great business.

It's growing phenomenally well.

We've got the best-in-class management team.

We've got a very creative development people in that business and we see a long runway of growth.

However, just when you talk about the DoubleDown, another great competitor, and when you look at the multiple that, that business was able to achieve, and you look at the trajectory of what we're accomplishing, I think that bodes well for us, and I'll leave it at that.

Great, and then if I could just ask one last one.

I think the game ops was maybe one part of the report where we saw a little bit of contraction.

Just curious where we are in the cycle there and if you think stabilization is near?

Yes, I think I'm a little disappointed, to be honest, with the performance in the first quarter, and we have an all-hands kind of approach on that right now.

And we believe that the Gamescape success and making sure of our sales team understands the power of what it's been accomplishing, where it's been launched, is a great story to tell to everyone that hasn't bought the games yet.

And we feel that we've got an improving trend as we go through the remaining quarters of the year.

Our next question comes from Steve Wieczynski from Stifel.

So I guess, first on the slot side of things, obviously, you had a really strong quarter for the for-sale products and you obviously benefited from some new properties.

But as we look at the replacements, the replacements were -- essentially, they're up slightly, just pretty much flattish.

And I guess the question is, what are you hearing from your customers in terms of a replacement spending as given how we're seeing some upticks here in some of these regional markets.

Are there any of your customers thinking about getting a little bit more aggressive on the replacement side of things?

I think it's a little early to say that we're seeing that but just start to sense a feeling that with the seasonal situation and starting to move into the past and the reinvestment cycles starting to be more obvious and the economic situation starting to modestly improve that we're cautiously optimistic that things will be a little bit better than the neutral that you're referring to, but let's wait and see.

Okay, got you.

And then going to the interactive side of things.

I know a couple of your competitors out there said acquisition costs have started to pick up a little bit in the space.

Is that something you guys are seeing?

Are you being pretty rational in terms of what you're willing to spend?

I think if you look at the results, it speaks for itself.

And I would say that this is the thing where I said, we have a management team that I believe is really, really top notch and we're paying for leads that are -- that have a return on them.

So I think our guys are very disciplined.

So I don't see any change in that trend.

Okay, got you.

And then one quick question.

I'm not sure if you'll answer this or not but obviously, your stock has had a -- a very positive move here in the last 6 months or so.

And I guess, with your leverage still being pretty high at this point, is there any thought in terms of potentially using equity to drive down leverage at some point?

No.

I think we feel very confident.

Our management team here feels empowered to drive the business forward and have no interest in doing that at this point.

Not to say that things don't change but right now, we feel very confident with our position and where we're going.

And we'd rather see us -- ourselves delever the old-fashioned way.

Our next question comes from David Katz from Telsey Advisory Group.

I wanted to follow up on the social -- rather, interactive aspect of the business.

Can you talk a little bit -- clearly, you have a long runway with it, I believe is what your comment was.

Can you talk about the dual aspects of that on the one side being a B2B and the other being B2C and how you see those evolving when you indicate you have a long runway for them?

Yes, I think each one is -- you're exactly right.

It's a little bit of different story.

On the B2C, we've got -- one of the things when I came in was -- we don't know where we're going with the business.

Let's always be thoughtful about the alternatives, whether somebody comes along and pays -- wants to offer us a fortune which we're not interested in right now or will we go and say, "Hey, you got the track for the future for an IPO"?

So we always want to be looking at that growth rate.

And the way we see the business today, we have phenomenal opportunities going forward.

And at these outsized growth rates, we want to keep running as fast as we can on that business.

And on the B2B, you saw the growth there as well, and I think we have a compelling proposition.

And as the operators continue to watch what we're able to accomplish, I think that growth continues as well.

Are there any sort of data points or anecdotal support from customers on that B2B side, in terms of what they're looking for or what they aspire to, that you as sort of leader on the enterprise systems side can engage with?

If you could put a little more meat on that skeleton.

Yes, I think it's the fact that Scientific Games and our powerful brands have very strong content and making sure we're thoughtful to provide a solution to our customers, to enhance their repertoire for their customers, is very important to us as well.

So I think we're just going to continue to do what we've been doing without getting into the recipe.

Very good.

And if I can ask just one more detail.

Is there any sort of update on your CapEx expectations for this year?

And any qualitative thoughts you can get me around '18 would be helpful as well.

Yes, it's Mike Quartieri here.

No, in the press release, we reaffirmed our original guidance between $280 million to $310 million, and I think that would be a consistent expectation, I think, every year going out unless there is a major system project on the lottery side that we would need to ...

Fund.

Fund.

Our next question comes from Mike Malouf from Craig-Hallum Capital.

I hate to keep harping on Interactive, but when you take a look at the EBITDA multiples -- I mean, the EBITDA percentage that you have this quarter, obviously, up from last year.

I'm just wondering if you can give us a sense of, since you're in this growth phase currently, what is the potential for EBITDA margins in Interactive?

Is it as profitable as the other parts of the business?

Yes, I think you have -- we can't talk about forward-looking stuff.

But I would say that Mike's commentary earlier on is really -- if you think about it, as we become bigger and we have more games launched, the marketing associated with the new games becomes a lesser factor, as you think about it in '18 and '19, et cetera.

So with that, I think we're all confident that the margins will continue to grow.

If we were to stop investing in the future, we'd have much higher margins, but that would be -- with the secret formula we have right now, that wouldn't make any sense.

So we're going to build the business very carefully and grow the margins but also, be thoughtful about making sure we've got the next big thing coming down the path.

Okay, great.

And any plans in the near future or even perhaps in the next 12 months for any further refinancings with regards to the debt?

No, I think we're just going to continue to watch the markets and take advantage of any opportunities that present themselves.

Of course, we will.

We are going to be smart about it, of course.

Our next question comes from Joe Stauff from Susquehanna.

I was wondering if you can, I guess, explain your thoughts as you think about the machine sales segment.

You had extraordinary growth in first quarter.

I know a lot of that kind of extraordinary growth was from the ilani.

And I guess, how do you think about this business going forward?

Your story, obviously, has a number of moving pieces.

So I wanted to see if you're comfortable or to the extent you can help us bracket ship-share.

I guess, if you look at your stock, and you look at your operational turnaround, past year or so, you've been able to stabilize that declining ship share and I guess, as of the end of the year, it was kind of maybe 27%, 28%.

The first quarter, I guess, in theory, would go up, given the outstanding performance.

And I was wondering where you think you can take that.

Again, just trying to think about the pathway and what you could actually do with the gaming unit segment?

Yes, I think, at the end of the day, the market share gain is going to be very careful because that's usually not a winning proposition.

The success of this brand and the other brands we compete with, very good companies, is the success of the games that you produce.

And we've got a lot of effort as you guys know in R&D to make sure we're thoughtful about the games that are coming out so that we continue to attract the attention of all the casino operators because if you have a successful platform, you're going to sell the product, and that's critically important to us.

So that, coupled with this signing of just as an example, I believe we have this unprecedented opportunity with the signing of James Bond and having the rights to all of the movies and all of the Bond characters and all of the Bond ladies and all of the characteristics, and you think about Bond and what that has done for the gaming industry, there's always a couple of scenes there.

So it's incumbent on us as an organization to make sure that we are being very thoughtful about this as we look to the next generation of gaming and trying to be on that cutting edge to say, hey, here's some new thoughts and new thinking.

And I think we've got a lot of effort right now going on into making sure we're being thoughtful about that and creative to ensure that we're taking full advantage of that signing as an example.

And I guess, can you talk about maybe the ilani as a case study about why -- what were some of the things that contributed?

Obviously, do you get -- you're getting such a high share and whether or not you can replicate that elsewhere.

Yes, I mean, I think it gets back to content and I think we have a great reputation in that market and success breeds success.

So beyond that, I don't think we want to get into.

And, ladies and gentlemen, our final question for the day comes from Chad Beynon from Macquarie.

Mike, you finished your response for the CapEx question with, unless there's another lottery, big CapEx.

And I wanted to kind of poke at that for a second.

We've read that in Italy, there could be discussion of pulling forward the instant ticket contract which is a very profitable, yet a very expensive one.

Could you just help us think about, I guess, what's out there in the press?

Anything legislatively?

And then more importantly, if this is pulled forward, how would you value that versus some of your other opportunities?

Well, obviously, Italy is a key market for us from an instant product size, so we're going to do whatever we need to do to make sure that we maintain that position and maintain that revenue and EBITDA growth for our company.

In regards to really other CapEx items, I think the next line of contracts that are really coming up, we've already talked about in the Maryland system contract, moving forward at this point.

There's legislative meetings taking place in May, which we hope that the contract gets signed at that point.

Pennsylvania is out for -- until the end of '18.

Italy will be out till 2019, so at this point, those are the 3 main contracts that we have that we would be looking for, to make that type of a large-scale investment in.

Okay.

And you haven't heard anything from -- legislatively from the Italian representatives or your contacts there, that this could potentially be pulled forward?

I guess, that was the first part of my question on that?

No, not at this point.

Okay.

And then just switching gears to the Spicerack acquisition.

This complements a lot of your homegrown games.

Are there any other segments with -- also kind of within social gambling where you think you could add on to kind of bulk up your overall offerings to customers?

Sure, and obviously we're not going to get specific on that.

But I would tell you that we have our eyes out to make sure that we're being thoughtful when something like that comes along.

This acquisition, I believe, is going to turn out to be a fantastic one for us.

And if you look at the business model of the #1 and the #2 player in that space, you'll see what they did, once they extended or expanded the reach of the bingo, with the introduction of some gaming within -- in that proposition.

So those are the kinds of things, thinking out of the box to kind of create the incremental value is what would get us interested.

Okay.

Ladies and gentlemen, at this time, that will conclude our question-and-answer session.

Yes, thanks a lot, I appreciate that.

Thanks for your joining us this afternoon, guys.

2017 has started well.

We're building momentum, and we're excited about our prospects for growth and improvement during the year.

Our team is focused on executing our strategies and our plans for '17 and beyond and continue to identify opportunities that can generate incremental value across our businesses.

As we proceed through 2017, we will remain disciplined in our attention to cost and execution.

We will be smart as we invest in innovation, to lay the foundation for 2018 and 2019 and beyond, and we will focus on continuous improvement to shape our business for the long-term benefit of our stakeholders.

We look forward to updating you guys on our progress during the second quarter conference call and thanks, and have a nice evening, everybody.

Ladies and gentlemen, that does conclude today's conference call.

We do thank you for attending.

You may now disconnect your lines.