Light & Wonder - Q4 2022

Transcript

Operator (participant)

Welcome to the Light & Wonder 2022 Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. Now, let me turn the call over to Steve Wan, Director of Investor Relations for Light & Wonder. Mr. Wan, you may begin.

Steve Wan (Director of Investor Relations)

Thank you, operator. Good afternoon, everyone. During today's call, we will discuss our fourth quarter and full year 2022 results and operating performance, followed by a Q&A session. With me today are CEO, Matt Wilson, and CFO, Connie James. Our call today will contain forward-looking statements. They 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 SEC filings. We will also discuss the 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, as well as in the investor section on our website.

In 2022, we completed a sale of our Lottery business to Brookfield Business Partners in the second quarter and the sale of the Sports Betting business to Endeavor in the third quarter. Accordingly, we have reflected these businesses as discontinued operations in our consolidated statement of operations for all periods presented. We are reporting our results of continuing operations in three business segments: Gaming, SciPlay, and iGaming. Amounts in disclosure is referring to combined include both our continuing and discontinued operations. As a reminder, this conference call is being recorded. A replay of this webcast and the company materials will be archived in the Investors section of our website. With that, I'm pleased to turn the call over to Matt.

Matt Wilson (CEO)

Thank you, Steve, and thanks to everyone for joining today's call. 2022 was a pivotal year for Light & Wonder. At our inaugural Investor Day last May, our team laid out a clear strategic plan and long-term targets to enhance shareholder value. We continue to deliver on that ambitious transformation plan with speed and urgency by positioning ourselves to win when it comes to performance and the successful execution of our business operations. In fact, we delivered double-digit top and bottom line growth year over year. Fourth quarter consolidated revenue increased 18% with significant growth across all line of businesses. For the full year, consolidated revenue grew 17%, which is even more impressive when you normalize for the $44 million VAT benefit in 2021.

We transformed ourselves into a streamlined, integrated organization with a reconstituted balance sheet and a clear focus on our core mission of becoming the leading cross-platform global games company. We now have significant momentum in 2023, which sets us up for continued success towards our $1.4 billion targeted consolidated AEBITDA by 2025. Let's start with some highlights. Light & Wonder has seen continued strength in gross gaming revenue, further proof of the resilience of our industry and the simple fact that at the heart of our business, people love to play games. In this quarter, our games and platforms drove record success across all three of our business units. Gaming saw a record 10th consecutive quarter of North American premium install base growth. In all, a record 45% of our North American install base is now premium, representing an enormously valuable profit center for us.

SciPlay generated record revenue, record payer conversion, and record ARPDAU as our investments continue to drive engagement and monetization. iGaming saw record GGR on our content aggregation platform, OGS, amid record performance by our original content. The scalability of our platform has led to record quarters through our new iGaming studio additions, ELK and Lightning Box. The latter of which experienced its fifth sequential quarter of growth under our management. Our fundamentals remain healthy, and we expect them to continue to drive results. In addition to continued GGR strength, we continue to see elevated revenue per day levels. Many of our operator partners have announced solid earnings, and we've also seen healthy player spend and engagement through our SciPlay games. All of these factors ladder up to one key takeaway. We're executing successfully on the strategic vision underlying the long-range targets.

Let's look at how we achieved that in Q4. As we discussed at Investor Day last May, the key growth drivers for gaming, aside from the ongoing market recovery, include our robust product roadmap and share gains in Gaming Operations and Game Sales. in Q4, the cabinets and games we've already launched enabled us to deliver impressive results in our largest and most profitable segments. Meanwhile, revenue per day continues to remain well above 2019 levels, a clear reflection of the industry's resilience and the performance of our games. A great example of this is the great Ultimate Fire Link franchise, which continues to be a key catalyst for growth for our MURAL install base.

In Game Sales segment, more than 5,000 units were shipped in North America, something we haven't done since 2019, and more than 7,700 units globally. In fact, we sold 31% more KASCADA Dual Screen cabinets in its first year of launch compared to the KASCADA Portrait, shattering the records of our historical best J43 cabinet. Our LANDMARK 7000 remained the number one stepper cabinet in the January Eilers report. Coincidentally, the KASCADA Dual Screen just won the Best Cabinet award and LANDMARK 7000 walked away with the Best Mechanical Reel Game award at the 5th Annual EKG Slot Awards show. All of this success is underpinned by chart-topping games like HUFF N’ MORE PUFF, DANCING DRUMS prosperity, and blazing 777, all of which are extensions of our evergreen franchises.

Additionally, we've further progressed into the VLT market on a recent partnership with the Oregon Lottery, continuing our commitment of expanding into adjacencies. Turning to Australia, we've continued to take share, ending 2022 around 500 basis points higher than 2019 levels in the for-sale market. Our popular game, DRAGONS UNLEASHED, reached 2,000 games installed, and THUNDER DRUMS is now among the top four games in Queensland. I'm also pleased to share that we achieved number one share in New South Wales clubs in January, our first year at Light & Wonder, in a market where we've made significant progress in just over a year, a clear demonstration of our ability to take share in our priority markets. Our success in Q4 also extended to our systems business.

Jon Wolfe has made an enormous impact in this space, both through his leadership and with the complementary technology brought in from House Advantage. For example, we expanded our base of loyalty installs in the quarter and saw further momentum in cashless, doubling the number of machines featuring cashless enablement compared to last year. Meanwhile, in tables, we continue to have the leading product and IP in the space. We saw growth across our entire portfolio, and our revolutionary Shuffler products are providing critical data analytics promoting efficiency for operators. With more subscribers to our Volt program, we continue to add to our recurring revenue streams. We enter 2023 with fantastic momentum and notably with a full pipeline of products and games that will continue to fuel our growth.

GTO X, led by our award-winning game designer, Ted Hase, who's delivered some of the biggest hits the industry has ever seen, will soon be launching two great games, DRAGON - JIN LONG JIN BAO and MONSTERS - FRANKENSTEIN. We're also eagerly anticipating the launch of our new COSMIC cabinet in Q2, with proven franchises like MONOPOLY and Ultimate Fire Link Cash Falls hitting the floors. What's more, this will be the very first year in which we have a premium product in every key category and every key segment, an unprecedented opportunity to further advance our vision as we launch more extensions of our evergreen franchises like DANCING DRUMS and GOLD FISH. Our recent systems win solidified our leading position and improved our value proposition, as we can now offer enhanced capabilities through seamless integration.

Our enterprise systems offerings are exceptional, providing longevity and faster go-to-market time. They're ready to be deployed for both new and existing customers. Looking forward in our tables business, we will continue to roll out enhancements on our hybrid EPG platform to increase tournament functionality, allowing operators to attract more players as we continue to provide leading table products that offer value to casinos. Our results in Q4, as well as throughout the year, demonstrate that we are delivering on our commitments. We anticipate that operators will continue to invest in their floors and that our leading talent and product portfolio will put us in a position to take additional share. That means even greater growth is on the horizon. Let's turn our attention to SciPlay.

At Investor Day, we talked about our key growth drivers, outpacing the Social Casino market, scaling up and closing the gap with our peers, and investing in both our SciPlay engine and our product roadmap. In Q4, we executed successfully across all of these areas. In fact, according to Eilers, SciPlay was the standout performer among the top social casino operators in Q4 and was crowned number one social casino operator at the EKG Slot Awards just last week. SciPlay continued to increase market share and posted a record revenue quarter, up 18% year-over-year to $182 million. Two of our largest games, JACKPOT PARTY and QUICK HIT slots, set revenue records of their own. For the year, we delivered record revenue of $671 million, up 11%.

These records validate the investments we've made to enhance SciPlay's core capabilities and product roadmap. Engagement also grew, and we set records in monetization KPIs, a landmark achievement and a major step towards scaling our ARPDAU. SciPlay continued to evolve its data-driven approach, propelling ad tech capabilities significantly ahead of the industry, and made several notable advancements that boosted ad tech by combining team learning with multiple data sources, predictive analytics, and valuable in-game advertising processes and strategies from our newly acquired [Alictus]. Additionally, SciPlay is testing its direct-to-consumer platform, which will enhance player relationship management and increase its global reach, accelerating the potential to expand margins over the long term and enhance player lifetime values. Entering 2023, we'll be accelerating strategies to continue our industry-leading social casino growth and take additional market share.

We'll continue to invest in our best-in-class efficiency of ad tech capability and improve returns on UA spend. We'll make prudent expansions into new games via our core social casino product roadmap. In short, we're going to keep doing what we know works, investing in our capabilities and product roadmap to drive player engagement and loyalty while continuing to grow monetization. Particularly of our core franchises, further differentiating our offerings from those of our peers. This is the power of our cross-platform strategy. For all the records we've set in Q4, we're only just getting started. Let's turn to iGaming, where we are uniquely positioned to succeed as the industry continues to expand. Q4 underlined the value of our leadership position in the industry as U.S. GGR experienced its ninth consecutive quarter of growth, up 12% sequentially.

We also saw significant growth in Canada, where GGR was up for the fifth consecutive quarter. In both the E.U. and the U.K., we saw our third consecutive quarter of GGR growth, with the E.U. up 17% and the U.K. up 27% over that period. We are the leader in this space because of our best-in-class content aggregation platform and because of our unmatched first-party content. In Q4, we saw strong first-party launches, including Terrific Tiger, the fourth in the Coin Combo series. Looking at the top 20 games in the U.S. on our OGS, roughly 75% of those are proprietary content, underlining once again that players love to play games across multiple platforms.

In Q4, we also expanded our portfolio internationally with a regionalized approach, leading to launches such as RAINBOW RICHES, POWER PITCH and CROPS OF CASH, Stash & Grab Frenzy, and RAGING RHINO MIGHTY WAYS. We are also pleased with our recent cross-platform launch of one of our most recognized games, Duo Fu Duo Cai Grand, as our operator partners revealed that it's one of the best-performing launches ever on their platform, and we continue to see strong performance across all three channels. These launches illustrate the power of our organic content development roadmap and our cross-platform approach. Going forward, we're doubling down on this successful strategy and accelerating our cross-platform approach to content development. You can now expect two of our top-performing land-based titles being launched digitally each month and additional games coming from the studios we've acquired.

Meanwhile, our live casino studio in Michigan received provisional licensing approval, and we're ready to bring our offering to market. This segment is a key driver to iGaming's long-term growth, representing as much as 30% of the TAM, and we're ready to compete and win with our full suite of table games offerings. Looking internationally, 2023 will be a year of continued strength through the regionalized roadmaps that have already brought us such success, as well as further expansion into new markets. We know that the digitalization of gaming is only going to continue, with new jurisdictions poised to come online in 2023 and beyond. Light & Wonder is strategically positioned to capitalize on those growth opportunities that come with it. When we reflect on the tremendous progress of the last year, it's easy to see why we're so excited about what's next.

Gaming continues to execute on a product roadmap designed to capture share. SciPlay continues to outpace the market, thanks to enhancements to its core capabilities and a growing pipeline of great games. iGaming continues its leadership position with original content in a rapidly expanding marketplace. We are entering 2023 with incredible momentum thanks to our successful fourth quarter and with a clear strategy in place for future growth. All the major pieces are in place. An unparalleled fleet of assets and intellectual property. A cross-platform strategic approach that is already bearing fruit with proven franchises that perform well across gaming, SciPlay, and iGaming. We expect eight key game themes to launch across all three platforms throughout 2023. Our revitalized R&D program, which is focused on developing and deploying the next generation of industry-defining content.

The investments we've made in this program and the work we've done to integrate its focus and operations are fueling sustainable growth across our businesses. The industry's best talent, whose fingerprints are all over the games we'll be launching this year. Most of all, a clear vision and strategic path that unifies and motivates our entire team like never before, becoming the leading cross-platform global games company. One more thing I'd like to add. We always say that great games are made by great people. At Light & Wonder, we put a focus on culture because it's the key to attracting and retaining the very best people in the industry. Our focus on culture also fuels our efforts around environmental, social, and corporate governance.

We're now aligned to 12 of the 17 categories of the United Nations Sustainable Development Goals, and we're also partnered with 20 responsible gaming organizations and campaigns globally. Further, we were proud to take home the DE&I Award of the Year at the Women in Gaming Diversity Awards, and Light & Wonder ranked among the top four gaming companies globally by the All-In Diversity DE&I Index. In closing, we kicked off 2023 with new energy and excitement within our organization, and with good reason. As the fantastic results from Q4 illustrate, we entered this year with significant strength, putting us on a clear path to delivering on our long-range targets that we laid out last May. I am so proud of what this team has achieved and so grateful to every single employee that made this success possible.

I think I speak for everyone when I say the best is yet to come. The future of Light & Wonder is brighter than ever. We're ready to deliver on the promise of sustainable growth as we lead the industry forward. Thank you. Let's turn things over to Connie.

Connie James (CFO)

Thank you, Matt, and good afternoon, everyone. Let me begin by saying how pleased I am with our results. We delivered exceptional fourth quarter and full-year performance, a clear demonstration of the strength of our strategy and ability to execute on our roadmap. Fourth quarter consolidated revenue increased 18% to $682 million, with double-digit growth across all three businesses. Operating income was $99 million and consolidated AEBITDA grew 23% to $265 million, driven by both higher revenue and significant margin improvement in SciPlay and iGaming. For the full year, consolidated revenue increased 17% to $2.5 billion. Operating income was $273 million and consolidated AEBITDA rose 15% to $913 million.

Adjusted for the VAT benefit in 2021, consolidated revenue was up 19% and consolidated AEBITDA increased 22% year-over-year. This is a real testament to our continued focus to drive margin enhancement across the business. For the quarter, consolidated AEBITDA margin from continuing operations was 39% versus 37% in the prior year period. We also saw significant sequential margin growth at SciPlay as record performance validated the investments we've made in key growth initiatives. FX continued to have an impact on the comparative reported revenues, specifically in iGaming and to a lesser extent, the Gaming business segment. On a consolidated basis, FX impacts are immaterial to our results. Turning to the business units, we saw impressive performance across every area of our business. Beginning with gaming, we saw substantial progress, solidifying the foundation for long-term growth and share gains.

We ended the year incredibly strong across all key metrics, with higher revenue per day and average selling prices resulting in healthy margins. Revenue in the quarter grew 18% year-over-year to $438 million and AEBITDA increased to $215 million, a 16% growth versus the prior period. This growth was driven by robust product sales in the quarter and double-digit growth in both systems and tables. AEBITDA margin in the quarter remained healthy at 49%. For the year, revenue grew by 21% and AEBITDA by 16%, with significant gains across all business lines. We saw continued operational momentum in North American Gaming Operations as the premium install base grew 8% year-over-year, exceeding 2019 levels. Game Sales continued to deliver solid growth in the quarter, with revenue up 11% sequentially and 41% year-over-year.

This was driven by increased demand for our cabinets, which yielded higher average selling prices, an increase of 4% year-over-year. In systems, we achieved a 26% quarterly revenue increase year-over-year on higher domestic hardware sales volumes and installs. It's important to note, our systems maintenance is a significant recurring revenue stream and is expected to be further enhanced with new loyalty functionalities being added to our existing capabilities. Lastly, in tables, we see the market continuing to recover, with revenues up 11% year-over-year in the quarter, driven by growth in both vault subscriptions and higher sales volumes. Overall, we anticipate solid demand and excellent performance extending into 2023 and beyond as we continue to expand our portfolio and meaningfully grow our Gaming business. Turning to SciPlay.

We delivered record fourth quarter and full-year performance, once again outpacing the Social Casino market and growing market share, clear evidence of the power of its enhanced core capabilities to generate results. The business achieved strong top-line growth, up 18% year-over-year in the quarter to $182 million and up 7% sequentially, led by two of our biggest games, JACKPOT PARTY and QUICK HIT Slots. For the year, we delivered record revenue of $671 million, up 11%. We grew fourth quarter AEBITDA 24% to $59 million and full-year AEBITDA was $187 million as SciPlay continues to invest in talent and core capabilities. We're pleased to see the marketing and UA investments we've made starting to pay off.

SciPlay's core business is demonstrating substantial progress with record key metrics across the board, including payer conversion hitting an all-time high at 10.4% in the quarter, average monthly revenue per paying user approaching $100, and record quarterly ARPDAU of $0.87, an 18% increase year-over-year. SciPlay had a record number of payers in 2022. We saw a 13% increase over the prior period, and now SciPlay has more payers than ever before in its history. This performance led the Social Casino market in 2022, where SciPlay grew market share. The financial results are a testament of SciPlay's successful execution of their strategy, and we expect to continue this momentum in 2023. Turning to iGaming, which has tremendous momentum. Revenue in the quarter grew 15% year-over-year to $62 million, and AEBITDA increased 27% to $19 million.

On a constant currency basis, revenue grew 22% in the quarter, with steady growth both in the U.S. and internationally. For the full year, revenue increased by 6%. On a constant currency basis, revenue grew 13% in the year. Driven by market expansion that led to record GGR in the U.S., as well as solid performance from our original content launches. AEBITDA margin improved 300 basis points to 31% in the quarter versus the prior period, driven by revenue growth, resulting in an overall AEBITDA margin of 33% for the year. U.S. iGaming revenue increased by 41% in the fourth quarter year-over-year. Internationally, we had our third consecutive quarter of sequential rebound with elevated GGR across the U.K. and Europe on our OpenGaming platform.

Year-over-year, the U.K. and Europe were up 27% and 12% respectively, driven by successful regionalized content launches. Looking forward, as we continue to expand our portfolio, we will take share through our content aggregation platform, Leading Hand, and upcoming live casino offerings. Moving to capital management. A year ago, we outlined our balanced and opportunistic capital allocation priorities in three categories. Number one, to pay down debt and create a healthy balance sheet and put us in a 2.5x-3.5x net debt leverage ratio range. Number two, to repurchase shares. Lastly, to continue making disciplined investments to drive sustainable and profitable growth. In 2022, we delivered on every one of these commitments.

First, we divested the Lottery and Sports Betting businesses at peak valuation, totaling approximately $6.5 billion in gross proceeds. Then immediately deployed a significant amount of those proceeds to reconstitute our balance sheet in the second quarter. Our net debt leverage ratio of 3.3x today puts us squarely within our targeted range. We now have $1.8 billion of available liquidity and more than $900 million of cash on hand, significantly boosting our financial profile and flexibility. For the first time in many years, our balance sheet is a strategic advantage for us. Second, we authorized a three-year, $750 million share repurchase program in the first quarter of last year and immediately executed on our commitment to return capital to shareholders.

We repurchased 7.2 million shares to date, or $413 million, fulfilling 55% of our authorization in year one. Third, we aligned our investment priorities with our greatest growth opportunities to drive long-term value. We invested prudently and organically in our core capabilities, content, and platform, as well as in complementary businesses and adjacencies. I'm confident that these investments will fuel sustainable growth across the business for years to come. Turning to cash flow. Cash flow in the quarter was primarily impacted by approximately $176 million in tax payments related to the divestitures. In total, our year-to-date cash flow was affected by approximately $818 million in costs associated with our strategic review and divestitures, including tax payments. Looking ahead to 2023, continued operational efficiency remains a top priority as we further integrate our businesses.

We are continually assessing opportunities to further optimize R&D spend by leveraging our world-class offshore development centers and deploying content cross-platform. This enables us to scale more efficiently and maximize every dollar of R&D. In 2023, as expected, cash flow will be impacted by costs to drive incremental efficiencies as well as remaining tax payments of $33 million related to the divestitures. We will continue to evaluate the appropriate use of proceeds from the sale of our Sports Betting business. The obligations under our debt covenants require that we use the proceeds to either invest in the business or repay additional debt by the end of 2023. We look forward to sharing more about our determination of the best use of these proceeds in future quarters. We expect free cash flow to scale in the second half of the year.

Moving to our capital allocation framework. In 2022, we made significant progress deleveraging and front-loading our three-year share repurchase program, all with a lens to increase shareholder value. As we've done to date, we will continue to maintain a balanced and opportunistic capital allocation framework. Importantly, we will continue to invest smartly, leveraging our core capabilities in order to enhance long-term growth and bolster our leadership positions. R&D and capital expenditures are key ways for us to achieve this. As we invest, we are committed to driving high ROI to enhance shareholder value. We will remain disciplined and scale investments only to the extent they exceed our return thresholds. After investing for growth and in the context of a healthy balance sheet, we will deploy excess capital in the most value-creating ways for our shareholders, including through our share repurchase program, additional debt reduction, and disciplined accretive M&A.

While our business is resilient, we recognize that markets are dynamic, and we are focused on maintaining a capital structure that is well-positioned against potential economic uncertainty. We will continue to optimize our cash balances to preserve optionality in the near term in order to maintain a flexible financial profile for sustainable growth and value creation. In closing, I'm truly proud of what the team has accomplished so far. With our reconstituted and healthy balance sheet, our enviable financial profile, our high margins, and strong cash generative businesses, coupled with our focus on operational excellence, Light & Wonder is poised to drive significant shareholder value. The fourth quarter was a proof point of our strong momentum and gives us confidence in achieving our $1.4 billion targeted consolidated AEBITDA by 2025. With that, we'll turn it over to the operator for your questions. Thank you.

Operator (participant)

Thank you. We have our first question comes from Barry Jonas from Truist. Barry, your line is now open.

Barry Jonas (Managing Director and Senior Gaming Equity Analyst)

Thank you so much. I wanted to start diving into the AEBITDA target, the $1.4 billion. Has anything changed in terms of the building blocks, the composition and maybe the cadence over the next three years to get there from here? I would just note that some of your competitors are guiding this year showing some conservatism around the macro, curious to get your thoughts here.

Matt Wilson (CEO)

Hi, Barry. Matt Wilson. Thanks for joining the call. I'll start off and then hand it to Connie. I think the path to 2025 results starts with a great Q4, that's what we're announcing here today. Growth across all key segments, Gaming, iGaming and Social Casino had a fantastic quarter. The good news is we'll be back here in front of this audience in just over 60 days to talk about Q1, I'll tell you that positive momentum really translating from Q4 into Q1. We're feeling fantastic about the momentum of the business, we'll share more with you very shortly. I think that really speaks to the health of the key markets that we operate in.

Seeing a lot of optimism and buoyancy in those markets despite some of the macro headwinds that we're seeing. I think in the result in Q4 2022 as well, you can see us demonstrating our ability to take share in priority markets. I think you can see that in the Australian market in gaming, we grew 500 basis points year-over-year. We were number one in the New South Wales market, which is a huge bellwether market for the Australian jurisdiction. I think you can see us taking share in mechanical wheel. We won the best mechanical wheel product at the IAGA Show last week. You can see us getting into adjacencies through the OSL announcement that you might have seen hit the wires recently. I think there's more to come.

You know, we're launching two new cabinets that you would have seen at the G2E Show, COSMIC and the Slant cabinet. They're in presale at the moment and building great funnels. Then another kind of key highlight that underpins the momentum going forward is Studio X. Ted Hase is an award-winning game designer. His first games are coming to market. They're both in presale at the moment, DRAGON and FRANKENSTEIN. We have all the pieces in place, and we've got great momentum exiting 22 into 23. Connie, you might wanna add just some of the building blocks of how we get to that, those numbers.

Connie James (CFO)

Yeah, happy to do that. Thanks, Matt, great to be with you, Barry, today. The building blocks are fundamentally the same as what we had outlined at Investor Day. As Matt said, we have even more confidence in our ability to achieve that given the momentum we're seeing in the business. Fundamentally, we're gonna grow every single one of our key businesses. The majority of the growth is gonna continue to come from Gaming, where we know there's a clear path to continue to drive Game Sales with some of the adjacencies and the products that Matt had mentioned. Also in global Gaming Operations, more broadly in the premium segment, where we recorded 10 consecutive quarters of growth, which we're really excited about. In SciPlay, you would have seen we had another ARPDAU record.

We know that there's a clear path to continue to lift that over time, and that's exactly what we're focused on doing. From a margin enhancement perspective, we're soft launching DTC at the moment, so that's another catalyst. In iGaming, we're gonna continue to do what we've done to date, which is all about making great content, in particular first-party content. We're excited to launch live casino here very quickly, which I'm sure Matt will talk about here, in the future. All that to say, we've got great momentum in the business. It gives us a whole lot of confidence in our ability to achieve the $1.4 billion AEBITDA we outlined in 2025.

Matt Wilson (CEO)

I think just speaking directly to kind of the macro conditions that you referenced, you know, a lot of the operators reported last week, there's optimism in their set of results. You know, a lot across our key markets, we're seeing kind of the dashboard lit up green in terms of the key KPI. The end market that we operate in at the moment look really healthy. You know, we're not delusional. You can speak to 10 different economists, and they'll give you 10 different versions of, you know, is there a recession coming and how deep might it be? You know, we've scenario planned for all 10 of those scenarios and many more, and we know the levers to pull should the macro conditions hit the sector that we operate in.

At the moment, you know, we're proving to be very resilient in terms of an industry.

Barry Jonas (Managing Director and Senior Gaming Equity Analyst)

Great. That's all incredibly helpful. I appreciate that. Just as a follow-up, some other land-based op competitors, including your former employer, are seem to be more focused now in iGaming. Just curious to get your thoughts how you see that impacting your positioning and strategy, if at all? Thank you.

Matt Wilson (CEO)

Yeah, fair question. I think, my personal view on this is unchanged, that competition is healthy for markets. It pushes everyone to be better, to do better, and it'll push us to build better and better products. I think it drives great outcomes for everyone, for players, for operators, for the industry at large. We've got a range of competitors in the marketplace today, and we've got a healthy level of respect for all of them, and we think there'll be many more to come because they really see what we see, which is just an amazing opportunity for growth. We feel great about our market position. This team, under Dylan Slaney's leadership, has been at this for well over a decade.

We made the acquisition of NYX a number of years ago. With that came talent, technology, and know-how. That team has been doing this for a very long time and, you know, building industry-leading products in the category. We love our position. You couple that with the live casino opportunity that we're entering into now. We think we're positioned well for the opportunity set that's in front of us. Really, you know, that's the heart of our cross-platform strategy that's unique to us. Build games, deploy them on slot machines in land-based casinos, take them into the iGaming universe, take them again into social casino. Yeah, again, we respect the competition, but we like the way we're positioned.

Barry Jonas (Managing Director and Senior Gaming Equity Analyst)

Great. Thanks so much, Matt. Thanks, Connie.

Matt Wilson (CEO)

You got it.

Connie James (CFO)

Thank you.

Operator (participant)

Thank you, Mary. With our next question comes from David Katz from Jefferies. David, your line is now open.

David Katz (Managing Director and Equity Research Analyst)

Hi. Good morning or good evening, everyone. I, Connie, I wanted to go back to some of the discussion about capital allocation. You know, in particular that there's, you know, a lot to do, and I just wonder if, you know, debt reduction maybe has started to drift higher up the priorities, you know, after investing internally. In particular, how are you thinking about the order of those choices today versus a quarter or two quarters ago?

Connie James (CFO)

Great. Thanks, David. Good to be with you. Fundamentally, I'd say if we just step back, I think it's important just to understand where we are today, because last year was so transformative for us. If you think about what we've now achieved for the first time in a long time, we have a really healthy balance sheet, which puts us in a great position. In fact, we had net leverage recorded at 3.3x for the quarter within our range of 2.5x-3.5x. We also made significant progress on our share repurchase program. In fact, we front-loaded that, executing about 55% in our first year. Importantly, we had the ability to continue to invest for growth.

To your point, as we look forward, we're gonna continue to take a real balanced and opportunistic approach to capital management, just as we've always done. We know that at the core of our growth is really organic investment, and we're gonna continue to focus on that. Where we have excess capital, we'll look to deploy that, whether that is our share repurchase program, debt reduction or potential M&A, where we can see that it's accretive. That being said, I think it's just important to note also in the prepared remarks, I mentioned that with the Sports Betting proceeds, we do have an obligation to either invest that in the business or pay down debt. We're continuing to look at the best use of those proceeds. We'll keep you posted on that.

Fundamentally, our whole program is focused on ensuring we have the optionality, the balance sheet flexibility in order to drive shareholder growth.

David Katz (Managing Director and Equity Research Analyst)

Thank you. I wanted to just go back to iGaming and go a little bit deeper. Because we've started to see some states talk about legalizing, I guess, mainly mine, do you need any legalization to occur in order to hit your targets for 2025?

Matt Wilson (CEO)

Yes. We watch with the same level of enthusiasm your home state there. You know, iGaming is a huge opportunity for us, like I just mentioned. It's hard to exactly predict when states will legalize, but we are seeing a lot of positive activity across a number of different states. You know, our view is the digitalization of gaming is inevitable. There's a confluence of just too many tailwinds for it not to happen. The success that we're seeing in the states that are already live are a testament to that. Yeah, really our opportunity is to position ourselves to continue to take share in the markets that are live right now. Taking, you know, increased share of first-party content and then exploring this live casino opportunity that's in, that's in front of us.

Connie James (CFO)

Just to the question specifically, David, we've taken a really prudent approach in how we think about the $1.4 billion target. We've had a couple medium-sized states towards the end of 2024 and 2025. However, they're immaterial in the big scheme of things. As Matt said, we see clear growth from focusing on our content and importantly, live dealer.

Matt Wilson (CEO)

Yeah. This is a natural business for us to own. It's about content. You know, we build content for the land-based business. We port that into iGaming. Our job is to position ourselves to maximize our share as these markets come online. That's what we're investing for. Again, it's inevitable, hard to predict exactly when it's gonna happen, but, you know, we believe in the coming years, the digitalization of gaming is gonna happen in a big way.

David Katz (Managing Director and Equity Research Analyst)

Thank you. Me too.

Operator (participant)

Thank you, David. With our next question comes from Ryan Sigdahl from Craig-Hallum. Ryan, your line is now open.

Ryan Sigdahl (Senior Research Analyst)

Hey, Matt, Connie. Good afternoon.

Matt Wilson (CEO)

Hey, Ryan.

Ryan Sigdahl (Senior Research Analyst)

I want to start on free cash flow. The chart in the slide deck, I think it's helpful to really break down a lot of the one-time cash outflows you had this year. A little bit of that sounds like it's going to carry into the first half of this year. How do you think about kind of the back half of this year? Is it achievable to get to your 45% free cash flow conversion targets? kind of talk to your second half this year and then into 2024.

Connie James (CFO)

Sure. great to be with you, Ryan. First, let me start with, you know, we're excited that we operate in businesses which naturally just have a high cash flow generation profile. You're right. we've seen this year a number of impacts associated with the divestitures, you know, on a full year basis, that was about $818 million, albeit put in the context of the $6.5 billion of gross proceeds, we're pleased with that outcome. As we look forward into 2023, there will still be a bit of noise in the number in the first half, primarily the tax payment we have in the second quarter of $33 million. Beyond that, I think you'll start to see cash flow scale.

As we get into 2024 and 2025, we're gonna really have the benefit of revenue growth in addition to a number of the operational efficiency programs that we have in place starting to drop to the bottom line, which will allow us to continue to scale margin. I mean, we're still confident in kind of clicking into that, you know, +40% free cash flow range as we get into 2025.

Ryan Sigdahl (Senior Research Analyst)

Just for my follow-up, I want to switch over to SciPlay, and I'll ask Josh tomorrow, but I'd be curious for your guys' point of view. They're significantly outperforming the industry, so kudos to everyone on that. Curious how important you think Light & Wonder's cross-platform strategy is contributing to that or if it's, you know, other kind of company-specific factors. Thanks.

Matt Wilson (CEO)

Yeah, I'm glad you asked the question. I think, you know, Josh and the team should take the victory lap on what is an outstanding quarter and kind of back-to-back outstanding quarters. There's a lot of ambition in that team, a lot of humility as well. They're not done. They've got the work to do in front of them to continue to grow that business. If you look at the numbers, it was records across the board, revenue, ARPDAU, conversion. I think there's a lot to be proud of. I think really this comes back to the investments that we made there about monetization and about, you know, making sure that we can close the gap on ARPDAU between us and some of our peers.

We still see a lot of headroom between, you know, where the SciPlay ARPDAU sits and where some of the competitors are at. More growth to come from that business. You know, I think, going to your question specifically about cross-platform, this was the decision that we made through the strategic review. Like, the company that we wanted to be was an organization that had games and technology at the center of its universe. You know, we divested lottery and sports, which looked like parts of the portfolio that didn't ultimately fit with the rest of the businesses. If you look at land-based, the majority of what they do is building great slot content, putting it on cabinets, you know, deploying that in land-based casinos, taking that again into iGaming, you know, sweating those assets, leveraging those franchises.

If you look at the content that's driving a lot of the success in SciPlay, it's those evergreen franchises coming out of the land-based business. These are now businesses that fit like hand in the glove. They belong together. I think it's the combination of the investments that we made in that business around monetization, but also, you know, the fact that we're able to take these incredible franchises from the land-based business and deploy them into social casino. Yeah, Josh will give you a lot more about that. Yeah, Josh and that entire team at SciPlay have had a fantastic quarter and should be acknowledged, and thanks for that. Thank you.

Ryan Sigdahl (Senior Research Analyst)

Thanks, Matt, Connie. Congrats and good luck, guys.

Connie James (CFO)

Thank you.

Matt Wilson (CEO)

Cheers. Thank you.

Operator (participant)

Thank you, Ryan. With our next question comes from Jeff Stantial from Stifel. Jeff, your line is now open.

Jeff Stantial (Managing Director)

Great. Good afternoon, Matt, Connie. Thanks for taking our questions. Starting off, Connie, I was hoping to get an update on where you stand from the supply chain and just a broader cost inflation standpoint. Where are you seeing relief more recently? Where there are pressure points still? The world looks today, how should we think about the timing for some of this to flow through to AEBITDA margins? Thanks.

Connie James (CFO)

Yeah, absolutely. Great to be with you. First, I'd say that as an organization, we've navigated incredibly well over the last few years, and it's just a huge testament to the team. As we sit here today, things are much better than they've been in a really long time. It's interesting. When we step back and look at this, you know, there's perhaps a bit of a silver lining that we've seen. This, the disruptions that occurred over the last few years really forced us to think about how do we ensure that we optimize as an organization. I say that it accelerated some of our plans from globalizing some of our product offerings to allow for commonality amongst parts. It deepened our reach into the supply chain, really partnering better with a few of our Tier 2 and Tier 3 suppliers.

It forced us to think about value engineering and importantly, also about how we leverage a geographical network to manage risk and importantly improve costs. All of that to say that, you know, we're excited actually about some of the operational efficiencies that we've now driven through the business, which we expect to benefit for years to come. All of that, I'd say, you know, we're in a great position today. We had an amazing Q4. We didn't have any hiccups from a supply chain perspective, and I think we're in a good place to continue to meet ongoing demand.

Matt Wilson (CEO)

Kudos to Anthony Zamani, who leads that effort for us. I'll tell you, through COVID, there were some sleepless nights around supply chain for CEOs around the gaming industry. I think, by and large, those issues are behind us now. The industry is in much better footing in terms of supply chain. Well done to Anthony and the entire team.

Jeff Stantial (Managing Director)

Great. That's helpful. Thank you both. Then for my follow-up, moving over to the Game Ops business, obviously a ton of heavy lifting here over the last couple years. Can you just, you know, dig a bit deeper into how you're thinking about the roadmap here to 2023 and kind of specifically, how do you think about the timing for some of these retooling efforts to really start to flow through to installations and to yield as 2023 progresses? Thanks.

Matt Wilson (CEO)

Yeah. This is a business that's very close to my heart. It's an organization or part of the organization that was, you know, one of the key strategic tenets when we took over the business. Siobhan Lane is now running the Gaming business and doing a fantastic job. This is a part of the organization that continues to be a major focus. We've put a lot of effort, energy and investment behind the gaming ops organization. We've just clicked off a 10 consecutive quarter of gaming ops install base growth. This is a business that was in systemic decline prior to the pandemic. Nice to see that continuation of the momentum coming through. Comes back to launching the right hardware. We're just on the verge of launching the COSMIC cabinet. You might have seen that at the G2E show.

We have a sales pipeline building. It's in presale at the moment. Two of Ted Hase's games will launch on that. We've got the right talent, we've got the right hardware, we've got the right momentum, and there's more investments coming to support that over time. You've also got Rich Schneider, who I think is a hall of fame CPO, pulling a lot of the strings to make sure that we've got the right investment in the right area. Good momentum in that business. I think things like COSMIC and Ted Hase and his team, alongside all the studios that we'll have, will just help turbocharge that over time.

Connie James (CFO)

Maybe just building also off of what Matt said. We're excited to see, as he mentioned, the 10 consecutive quarters of premium Gaming Operations growth. We do intend to continue to grow that business. Part of what you've seen right now is just a turbocharging of some of the investment, not only from an R&D perspective, but also as a CapEx perspective. We had a really aging install base. I think we're finally starting to get to that point where you're gonna start to see further growth as we've kind of trued up that underlying position. The games are getting better and better. For the first time, we have a full, really dynamic suite in terms of a portfolio to play in every key segment within Gaming Operations. We're excited about the growth prospects ahead.

Jeff Stantial (Managing Director)

Great. That's helpful. Thank you both. I'll pass it on.

Matt Wilson (CEO)

Yeah, thanks for the question.

Connie James (CFO)

Thank you.

Operator (participant)

Thank you, Jeff. With our last question comes from Chad Beynon from Macquarie. Chad, your line is now open.

Chad Beynon (Managing Director and Analyst)

Good evening, Matt, Connie. Nice execution, thanks for taking my question. Matt, just wanna start with one of the goals that you laid out at the Investor Day. You talked Game Sales, market share in North America and also in ANZ. In your earlier comments, you talked about Australia up 500 basis points and some nice wins there, already executing and probably, you know, pretty far along in that market share goal. As it pertains to North America, also, you mentioned some launches and, you know, some of the things you're working with. How should we think about, you know, when this goal should potentially be met? I think also at the Investor Day, you talked about a 2023 sales number.

Wondering if that's still kind of in your scope. Thanks.

Matt Wilson (CEO)

Great question. Well, like I said, some signs of growth in key segments, more to come. I think this is really about making sure two things: we've got the right hardware launched in each of the key segments. I think COSMIC and the Dual Screen Slant that we launched in the first half of this year will kind of really round out the portfolio and make sure we have the arsenal complete across all the major key segments. It's really about, you know, optimizing this R&D program that Rich Schneider and the team are leading. We've managed to raise our levels of investment in R&D pretty dramatically over 2019 levels, we've done that while maintaining margins.

We've given Rich and the team, you know, all of the dollars that they need to go out there and to make sure that all the studios that we have are fully funded. You know, we onboarded Studio X with Ted Hase. It's been about putting the investment in place and just making sure we have, you know, all of the right tools in place to drive that level of product quality over time. I think, you know, the infusion of Ted Hase's games is just adding to that. Again, DRAGON and FRANKENSTEIN are in presale at the moment. More to come in the back half of the year.

Yeah, like I said, there's pockets of share growth across the business, but we're really laser-focused on making sure that we drive the share outcome that we've committed to. Connie, anything to add? Great.

Connie James (CFO)

I'd just say that there were really two fundamental key pillars as we were looking at the share, or should I say, the four sales segment. The first one was we expected to see a market recovery into 2023, I think the back half of 2022. What we're seeing in the funnel today is a really positive sign that that's happening. The second one, to Matt's point, is to ensure that we had product in all of the right categories, importantly also with a number of adjacencies which are coming online soon. We feel good that those two key tenets of the commitment are in really good shape.

Matt Wilson (CEO)

Yeah, I think that's what you saw in the Q4 numbers, a pretty dramatic uptick in terms of Game Sales number. Like I said, we're expanding into the Oregon Lottery. We have just a handful of units out right now, and that we see that as a big market opportunity for us. Then we've got, you know, big ambitions in VLT and beyond. I think it's the culmination of the, you know, the core replacement market and then these adjacencies that we're entering over time. Yeah, feeling convicted about the direction of travel there.

Chad Beynon (Managing Director and Analyst)

It's great to see. Thank you. My follow-up, I don't wanna leave systems out of this call. 30% growth in the back half. You talked about, you know, House Advantage and the business is almost back to 2019 levels. Wondering if this should be viewed as, you know, maybe some deferred CapEx from your operators that are spending here, or if, you know, the growth, the offering, kinda what you guys are doing on the cashless side, could provide, you know, some pretty strong growth. Maybe not at those levels, but that could continue in the near term. That's all for me. Thank you.

Matt Wilson (CEO)

Yeah. Yeah, thanks for going deep into the portfolio. That, that's an area that we're pretty proud of. You know, we made the acquisition of House Advantage. We brought in a leader like Jon Wolfe, who is exceptional, knows the operator's pain points, knows how to run technology teams. He's been spending a good amount of his time over in India, kinda working with our best-in-class system development team. Feeling a lot of momentum there. We've been to two shows with him now. We went to G2E and then also to ICE, and we're talking about kinda his vision to take systems to the next level. It was a great close to Q4, and we see good momentum heading into Q1.

Yeah, it's a business that we felt like was a bit underinvested, needed some retooling, needed a new leader to take us forward, and that's what we've got with Jon. You know, he's really reinvigorated things, feeling really good about the systems direction.

Chad Beynon (Managing Director and Analyst)

Thanks. Appreciate it.

Matt Wilson (CEO)

You're welcome.

Operator (participant)

Thank you, Chad. We have no further questions on the line. I will now hand back to Matt Wilson, CEO of Light & Wonder. Matt.

Matt Wilson (CEO)

Yes. Thank you all for your time and support. We've delivered on an ambitious and transformative plan while driving operational success and double-digit growth in our business, setting us up to achieve the long-range targets we've laid out last May. Our teams around the world are energized and enthusiastic about our opportunities. I'll just close by saying that behind these great numbers are a great group of people who have never been more dedicated to achieving great things, a real testament to the culture we're trying to build here at Light & Wonder. We're excited about our future, and we see strong momentum continuing in the business in the year to come. Our industry-leading talent, games, and technology put us in a strong position to deliver on our product roadmap, capitalize on enormous opportunities ahead, and lead the industry in convergence.

On behalf of everyone here, thank you for your time, and have a great rest of your day.