International Game Technology PLC (NYSE:IGT) Q4 2023 Earnings Call Transcript
International Game Technology PLC (NYSE:IGT) Q4 2023 Earnings Call Transcript March 12, 2024
International Game Technology PLC misses on earnings expectations. Reported EPS is $-0.04 EPS, expectations were $0.45. International Game Technology PLC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the International Game Technology PLC Q4 '23 and Fiscal Year 2023 Earnings Call. [Operator Instructions] I will now turn the call over to Jim Hurley, Senior Vice President, Investor Relations. Please go ahead.
James Hurley: Thank you, Sara, and thank you all for joining us on IGT's Q4 and full year 2023 conference call, which is hosted by Vince Sadusky, Chief Executive Officer; and Max Chiara, our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions. During today's call, we will be making some forward-looking statements within the meaning of the Federal Securities Laws. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings.
During this call, we will discuss certain non-GAAP financial measures. You'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted to our Investor Relations website. And now, I'll turn the call over to Vince Sadusky.
Vincent Sadusky: Thank you, Jim, and hello to everyone, joining us today. We delivered a strong finish to 2023, with Q4 operating income growing 11%, yielding 160 basis points of operating margin expansion and strong free cash flow generation. This enabled us to meet our fiscal year 2023 financial goals, which were raised 2 times during the year. In fact, the growth across our Global Lottery, Global Gaming and PlayDigital segments contributed to record breaking achievements of $1 billion in operating income, $1.8 billion of EBITDA, and a 41.3% EBITDA margin. This translated into significant cash generation in the period, including record cash from operations of over $1 billion, bringing the company's net debt leverage to the lowest level ever.
It's an impressive set of accomplishments that confirms we are on track with our long-term strategic and financial goals across the portfolio. I'd like to acknowledge the hard work of the entire IGT team in delivering them. We have a culture, grounded in responsibility, collaboration, and passion. These values are not only the key drivers of our success, but also make IGT a great place to work. So thank you to all my IGT colleagues around the world. In fact, IGT was recently recognized as a top employer in the U.S., Italy, and Canada by the Top Employers Institute, which is the global certification company recognizing excellence and conditions employers create for their people. I'd like to spend some time on the operating performance of each segment beginning with Global Lottery.
We maintained our leadership position in 2023 through a combination of organic growth, portfolio expansion and contract extensions. That's clear in the 7% revenue growth achieved in Q4 as well as the 6% growth for the full year period, net of the Italy commercial services sale. These are impressive numbers for a business of this scale. Same-store sales, rose little more than 2% in the year, consistent with the steady low-to-mid single-digit growth for the lottery industry. Italy same-store sales increase of nearly 7%, which is especially noteworthy. The lotto and scratch and win games, we operate in Italy are among the largest and most successful in the world. Italy's strong momentum during 2023 reflects IGT's expertise in understanding player behavior, developing compelling new games, managing a broad distribution network and officially conducting day-to-day operations.
The low-single digit same-store sales increase in North America and the rest of the world, was achieved on top of accelerated growth in the last few years. iLottery sales continue to expand at a fast cliff up over 40% in 2023, mostly driven by organic growth in existing markets. During the year, we bolstered our contract portfolio with multi-year extensions in some of our largest jurisdictions, just as California, in addition to other key markets like Kentucky and Virginia. We also added some new business to the mix. We went live with the new facilities management contract in Connecticut and launched instance in passive games in Brazil, state of Munis drive an important foothold in a market with significant potential. We were also awarded an iLottery platform contract in Connecticut, where we expect to go live with draw based games later this year.
Lottery profitability improved in 2023 with operating margin expanding 100 basis points to 36%. Lottery is a large steady growing and resilient industry with recession proof characteristics. Growth accelerated during the pandemic, and our 2023 results confirm that we are successfully maintaining these higher play levels with significantly improved margins. Operating margins are up 600 basis points from their pre-pandemic level. We expect the industry to expand at more customary low-to-mid single-digit rate off this higher sales base, fueled by organic growth and growing our lottery adoption, especially in the U.S. There are some new opportunities in the horizon, such as Brazil, where many states are looking to launch lottery games. Now on the gaming.
The focused execution of key product and operational strategies is fueling strong growth for our Global Gaming segment. This is especially evident in profit performance with Q4 operating income up 17% and full year operating income up approximately 30%. 9% revenue growth for the year reflects broad based strengths across several key performance indicators. We shipped over 35,000 gaming machines in 2023, up 7% from the prior year, and achieved record average selling prices. Unit growth was fueled by a double-digit increase in Casino units led by replacement demand. We continue to release high performing new games such as Magic Treasures, which has two titles ranking in the top-10. We also have three of the top-10 New Mechanical Reel games. The PeakCurve49, DiamondRS and PeakSlant32 continue to rank among the top North American cabinets in their categories.
Our global install base grew 9% to nearly 54,000 units, reflecting strong premium unit expansion in the U.S. and Canada and considerable growth in Latin America. We delivered six consecutive quarters of install base growth in the U.S. and Canada led by premium units and nine consecutive quarters in the rest of the world. Premium growth is fueled by the continued success of Prosperity Link and it's accelerated with the launch of Mystery of the Lamp, which was recently named top performing new premium game at EKG slot awards show. We have an exciting pipeline of new for-sale and lease games planned for 2024, including the launch of the much anticipated Whitney Houston slots on IGT's new SkyRise cabinet this spring. It was another record year for both revenue and profit at our PlayDigital segment.
9% revenue growth was fueled by double-digit increase in iCasino GGR across geographies. Operating profit rose over 30%, yielding 500 basis points of margin expansion, highlighting the powerful leverage inherent in this business. Strong iCasino GGR growth is a direct result of new games and creative solutions designed to deliver a rich player experience. Innovation is a vital growth driver in the absence of current new market regulation, especially in the U.S. Our top performing games leverage IGT's unique capabilities. Wheel of Fortune Triple Gold Spin is the first and only omnichannel jackpot game in the U.S.. Inspired by our highly successful Powerbucks franchise in Canada. These games are effective player acquisition tools. They engage players across platforms for large scale wins with combined jackpot liquidity between land based, mobile, and online formats.
In addition, our customers have had success with bespoke games that Taylor IGT's leading IP for a specific customer. Examples include Cleopatra Fort Knox and Blackjack Go for FanDuel Casino and Caesars Cleopatra for Caesars Palace Online Casino. We've also begun deploying our unique suite of user engagement and analytic tools. These are designed to provide real time player insights for our customers and drive player productivity. We've seen great results with early adopters and we look forward to rolling these out more broadly. In sports betting, we entered four new jurisdictions in 2023, and had 26 new installations, including 20 new casino retail locations, three on premise mobile launches and three statewide mobile launches. We also introduced sports betting functionality with the capability to live stream sports on our PeakBarTop and CrystalFlex terminals.
PlayDigital growth is dependent on new iGaming legislation, which has been slower than expected. This appears to be the case in 2024 as well. In that context, we'll be focused on driving cost efficiencies to stay on track with our margin expectations for the business. We're pleased to have achieved record breaking profits for the year. The IG team executed with excellence. You see this in the momentum we had across segments. Our 2024 outlook, which Max will walk through later primarily reflects organic growth for the existing businesses. Recently, we announced the transaction to spin off our Global Gaming and PlayDigital businesses and merge them with Everi's existing operations. The decision was the result of a strategic evaluation with the goal of unlocking the value of our portfolio.
IGT shareholders will retain 100% ownership of the predictable growth and resilience of our Global Lottery pure play while owning 54% of the faster growing gaming, digital and fintech business. We believe the creation of two stronger, more focused companies, each with top notch teams and simplified business models, better positions each company to service its customers and create significant value for stockholders. It allows for more focused operating and capital allocation strategies. Capital structures that are optimized for different business models and increased flexibility to pursue organic and inorganic growth strategies. It also provides the opportunity for investors to better appreciate the intrinsic value of each standalone business.
For context, Lottery peers trade between 12 and 18 times EV-to-EBITDA. Compared to IGT at just 6 times, and unmatched IGT's scope of capabilities. The new gaming business will have a similar scale and growth trajectory as it's peers. And that's before the benefit of potential revenue synergies. These gaming peers trade between 11 and 13 times EV-to-EBITDA. IGT has a broad global product offering across Class-III VLTs iGaming and casino management systems. Everi's business is focused on North America, primarily with Class-II games and extensive fintech capabilities. The combination of the two companies with complementary capabilities and geographic footprints, creates an integrated omnichannel one-stop shop addressing all aspects of the gaming ecosystem that we believe will provide a superior value proposition of best in class and efficient solutions.
Together, we can generate touchpoints across the entire player journey from the casino floor to mobile. The business has an attractive recurring revenue model, with recurring revenue streams from gaming operations, iGaming and fintech solutions, representing over 60% of pro-forma revenue. We expect revenue to grow at a mid-single-digit compound annual growth rate through 2026 with adjusted EBITDA increasing at an even stronger high single-digit rate. That's through the mix of organic top line growth for the existing businesses, enhanced by significant cost synergies, mostly from straightforward supply chain and real-estate optimization initiatives. These synergies on their own are worth over $500 million in value for the combined business. Given the minimal business overlap between the two companies, there are some compelling revenue synergies across products and geographies that are not yet factored into our outlook.
We expect to manage the business with a strong balance sheet and conservative leverage profile. And improved conversion of adjusted EBITDA-to-cash flow, should allow for investments in both organic growth and M&A, significant debt repayment and share buybacks. The company will be made up of a best-in-class team across both organizations with longstanding industry knowledge, relationships, and a proven track record in B2B, gaming, and fintech. The executive team has over 20 years of average experience across M&A integration. Needless to say, we're very excited about the opportunity for long-term value creation for the standalone Lottery and Gaming business. Now I'll turn the call over to Max.
Massimiliano Chiara: Thank you, Vince. And hello to everyone, joining us on the call today. Our fourth quarter and full year 2023 financial performance was strong, achieving the upgraded outlook provided on our Q3 earnings call on all key financial metrics. We delivered record profit on a full year basis, despite the comparison to prior period affected by significant divestitures, like Italy gaming in 2021 and commercial services in 2022. These results confirm that most of our long-term targets have already been achieved or are confidently insight with a clear trajectory to get there. A high level summary of our financial results is included here on slide 13, including comparisons to the prior year. In the fourth quarter, we generated revenue of over $1.1 billion, up 3% year-over-year, driven by a 7% increase in Global Lottery on strong product sales and continued momentum in Italy.
Operating income rose 11% to $256 million and operating income margin increased 160 basis points to 23% reflecting stronger performance across business segments. Adjusted EBITDA of $454 million increased 9% over the prior year period and adjusted EBITDA margin expanded 190 basis points to 40%. Adjusted EPS rose 40% to $0.56 per share, driven by the strong increase in operating income. For the full year, we generated revenue of $4.3 billion, up 2% or 7% net of the Italy commercial service sale on mid-to-high single-digit growth across business segments. Strong Italy same-store sales in Global Lottery, easing of supply chain costs and R&D process improvements in Global Gaming and strong operating leverage in PlayDigital drove operating income up 9% to $1 billion, which is a record profit in our company history.
Operating income margin rose 140 basis points to 23%. Full year adjusted EBITDA of $1.8 billion and adjusted EBITDA margin of 41%, also achieved the highest level in company history. Reported EPS was $0.77 and adjusted EPS was over $2 per share a 2% increase year-over-year, driven by higher operating income, partially offset by some tax headwinds. Now let's review the results of our three business segments. Global Lottery delivered $681 million in revenue in the fourth quarter, an increase of 7% driven by strong product sales and Italy same-store sales growth. Global same-store sales declined 3% reflecting the impact of strong U.S. multi-state jackpots sales in the prior year that were bolstered by the record $2 billion Powerball jackpot that hit on November 7, 2022.
Same-store sales in Italy rose 3% with growth in both instant ticket and draw games. Customer demand for IGT's innovative hardware drove fourth quarter product sales revenue up 94% year-over-year, propelled by large GameTouch28 self-service terminals sales in Michigan and Ontario and the sale of a central iLottery system in Poland. Operating income rose 10% to $238 million in the fourth quarter. Operating income margin expanded 110 basis points to 35% on continued strong momentum in Italy and increased high margin product sales. And despite lower benefits from jackpot activity. For the full year, revenue of $2.5 billion was 2% lower year-over-year, but increased 6% excluding the Italy commercial service business sales. Operating income of $913 million was in-line with the prior year, despite a $34 million contribution from Italy commercial services last year.
Operating income margin increased 100 basis points to 36%. Global Gaming revenue of $390 million in the fourth quarter was slightly above the prior year despite unusually high jackpot expense, associated with a higher-than normal frequency of jackpots. One on the Nevada Megabucks, wide area progressive game, increased terminal product sales revenue and higher IP fees were offset by lower system sales. We shipped nearly 9400 units in the fourth quarter, driven by continued strength in casino replacement units which grew 6% year-over-year. Global ASP were $15,900 with North American ASP increasing 4% to $16,300 confirming the expected positive trajectory following a blip in the third quarter due to mix. The global install base expanded to over 53,900 units with significant increases across geographies.
Momentum in the business accelerated in the fourth quarter as the U.S. and Canada install base grew 1% sequentially and 6% year-over-year on continued success in multi-level progressive games. While the install base in rest of world was 4% sequentially and 14% year-over-year, reflecting growing demand for high performing games in Latin America and parts of Europe. Fourth quarter operating income rose 17% to $80 million and operating income margin expanded 290 basis points to 21%, as easing of supply chain costs and R&D process improvements were partially offset by the higher jackpot expense dynamics, I explained earlier. On a full year basis, revenue of $1.6 billion increased 9% on broad based strength across key performance indicators. Operating income rose 29% to $313 million and operating income margin expanded 320 basis points to 20%.
PlayDigital generated $59 million in revenue in the fourth quarter, down 10% from $65 million in the prior year, due to a benefit related to jackpot expense in the prior year and lower sports betting volume and unfavorable hold rates in Rhode Island. iGaming GGR trends remained strong, with increases across geographies, including double-digit growth in the U.S. and sports betting GGR in-line with the prior year. Operating income increased to $17 million and operating margin rose 360 basis points to 29% primarily driven by disciplined cost management and reduced variable compensation cost. Continuing to proactively manage the cost structure is a priority in 2024 given the expected lower progression on new legislation expected in the next year.
Record revenue and operating income levels were achieved in the full year period, revenue increased 9% to $228 million on iGaming growth across geographies. Strong operating leverage drove operating income up 32% to $65 million with OI margin expanding 490 basis points to 29%. Record level operational performance and a 58% cash conversion rate drove cash from operations to over $1 billion. The highest level in company history, with capital expenditures and deferred license fees of about $420 million. Free cash flow of around $620 million exceeded our expectations. Adjusted free cash flow was over $800 million. We've been executing on our balanced approach to capital allocation over the last two years, generally tracking very much in line with what we presented at our investor day in November of 2021.
We returned $160 million to shareholders in 2023 in the form of cash dividends and we have $145 million outstanding under the current share repurchase authorization after having used about half of the $300 million program. Total liquidity remains robust at $1.8 billion at year end, which includes $1.2 billion in additional borrowing capacity from undrawn credit facilities. In the last three years, we have progressively strengthened our credit profile with significant debt reduction of over $2.2 billion and net debt leverage improving 3.5 turns to a record low 2.9 times. This leaves us well within our target leverage range of 2.5 times to 3.5 times. And in a nice position with no meaningful near term debt maturities. This improved credit profile was also reflected in credit rating actions taken early in the year by rating agencies, with Moody's upgrading our rating to Ba1 from Ba2 with a stable outlook and Fitch assigning an issuer rating of BB+ with a stable outlook and an investment grade senior debt rating of BBB-.
In addition, last week following the announcement of the planned spin and merger transaction both S&P and Fitch placed IGT on a positive CreditWatch. Let me now introduce our 2024 outlook, in an effort to provide a simpler view on underlying business expectations for the year. We are assuming the transaction closes in early 2025. This eliminates the need for complex accounting adjustments to the outlook if we were to achieve a 2024 closing. We believe this approach also helps you assess our progress toward the long term targets provided at our last Investor Day. For the full year, we currently expect to generate revenue of $4.3 billion to $4.4 billion, implying year-over-year growth of between 0% and 2%. Operating income margin is expected to be between 20% to 21%, which includes a 300 basis point negative impact from $130 million in pre-closing separation and divestiture costs related to the planned spin and merger transaction.
Those costs are expected to be incurred ratably throughout the year, excluding the separation and divestiture cost, a view that we believe offers a better assessment of underlying business performance. Our outlook calls for an operating margin between 23% and 24%, up 200 basis points higher than in 2023. Operationally, this outlook assumes Global Lottery same-store sales will be flat to slightly lower year-over-year due to the strong jackpot activity experienced in 2023. While large jackpots do tend to happen from time to time, the timing is unpredictable and therefore we don't plan for them in our forecast. If you exclude the impact of jackpots, same-store sales are expected to increase low single-digits across jurisdictions on the back of consolidating much higher play levels.
In order to facilitate a clear understanding of the split between RemainCo activities and the businesses that will merge with Everi. We have decided to aggregate Global Gaming and PlayDigital into a single segment named gaming and digital. Starting with our Q1 2024 results. The new segment is a simple aggregation of the numbers of the two previously reported segments with no change to our central cost allocation policy. We will continue to provide the same level of KPI and revenue disaggregation as in the past. So we expect minimal impact from the modification. Speaking about that, we expect gaming and digital revenue to increase at high single digit rate. This comes from continued growth in the install base, unit shipments and ASPs for gaming and growth in existing markets for digital as the pace of new legislation has slowed.
Operating income margin is forecasted to improve 250 basis points to 400 basis points on the back of the favorable KPI trends, continued improvement in supply chain and focus on cost discipline, moving us one-notch closer to our long term target of 28% to 30%. Turning to our cash flow, we expect cash from operations of at least $1 billion, which also includes the impact of separation and divestiture cost. Capital expenditures of approximately $500 million includes about a $75 million increase from 2023 related to recent contract wins and multi-year contract extensions in our Global Lottery business. For the first quarter, we expect to deliver revenue of approximately $1 billion and operating income margin of around 20%, which also includes a 300 basis point impact from pre-closing, separation and divestiture cost, I just mentioned.
Global Lottery same-store sales are expected to be down year-over-year as same-store sales growth in Italy is offset by tough North American jackpot comps. Gaming and digital revenue is likely to be lower than the prior year on a return to more normal seasonality in unit shipments against pent-up demand in the prior year period. In addition to elevated IP and software licenses last year. We are very excited about the significant value creation potential of separating IGT into two standalone pure play companies. The combination of IGT Global Gaming and PlayDigital with every Everi existing operations creates a podium position player with the scale, diversification, cash flow generation, and growth outlook that is on par with other gaming peers that trade at significantly higher valuation multiples.
I would now like to spend a few minutes reviewing some of the key financial aspects of the planned spin and merger transaction. As well as the remaining steps that will need to be completed to close the transaction. Upon closing the newly created combined Gaming entity will raise financing of $3.7 billion, which will be used to fund $2.6 billion distribution to IGT PLC and refinance every existing debt. IGT PLC plans to use the proceeds from this distribution to repay $2 billion of existing indebtedness and fund about $400 million in transaction related cash outflows. This debt reduction is expected to drive RemainCo PLC pro-forma net debt leverage down to around 2.5 times shortly following the closing of the transaction, putting us in an even stronger balance sheet position.
I'd like to address the taxable nature of the transaction, since it has been an area of focus for some of you. Most RMT transactions in the U.S. have done as tax free distributions followed by tax free merger. Since IGT PLC has the benefit of a participation exemption regime, tax leakage from the transaction is expected to be modest up to a $100 million or less than $0.50 per IGT share. The other important benefit of a taxable transaction is that it provides maximum flexibility on strategic initiatives like M&A and share buybacks for both entities from day one. The transaction is also taxable to IGT shareholders. We have provided additional disclosure on this matter in our 20-F to be filed with the SEC at the end of the day. Achieving a closing in late '24 or early '25 is predicated upon the successful completion of regulatory and licensing approvals as well as approvals from IGT PLC shareholders on the spin-off, of the Global Gaming and PlayDigital segments and every shareholder approval on the merger transaction.
To summarize, we delivered strong financial performance in 2023 with results that met upgraded financial targets. We generated significant cash flows and improved net debt and net debt leverage to the lowest level in company history. We're heading into 2024 on a solid foundation with clear prospects for profitable growth, significant liquidity and no material near term debt maturities. We have laid out the milestones to deliver the spin and merger transaction with Everi as expeditiously as possible and we are excited about the prospect for two standalone global pure play companies to create significant value for stakeholders. That concludes our prepared remarks. Operator, will you please open the line for questions.
See also 20 Cheap Alternatives to Aveda Shampoo and 15 Best States To Live In: 2024 Rankings.
To continue reading the Q&A session, please click here.
