Light & Wonder - Q2 2020
July 23, 2020
Transcript
Operator (participant)
Good afternoon, ladies and gentlemen, and welcome to the Scientific Games 2020 Second Quarter Investor Conference Call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. A brief question-and-answer session will follow the formal presentation. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. Now, let me turn the call over to Trent Kruse, Senior Vice President of Investor Relations for Scientific Games. Mr. Kruse, you may begin.
Trent Kruse (SVP of Investor Relations)
Thank you, operator, and good afternoon, everyone. During today's call, we will discuss our second quarter 2020 results and operating performance, followed by a question-and-answer period. With me this afternoon are Barry Cottle and Mike Eklund. 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 earlier this afternoon, the materials relating to this call posted on our website, and our filings with the SEC. We also will discuss certain non-GAAP financial measures.
A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press release, as well as in the investor section on our website. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the investors section of our website at scientificgames.com. Also, supplemental reference slides are available on our investor relations website. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call. Now, let me turn the call over to Barry. Barry?
Barry Cottle (CEO)
Thanks, Trent. Good afternoon, everyone, and thanks for joining us. I want to start by recognizing my colleagues. I'm so proud of the way our team has stepped up to help each other, our partners, and our company. We are navigating the current environment incredibly well, as evidenced by our strong cost containment and cash management, which allowed us to significantly outperform our cash flow expectations for the quarter. This better-than-expected performance is a testament to our team's ability to effectively manage our business in the short term, while also setting ourselves up for success as the economy begins to reopen. We are very aware that there are still many unknowns in the coming months, and therefore, we'll be cautious in how we think about bringing costs back to our business. Ultimately, though, we are optimistic in our outlook for the rest of 2020 and beyond.
We have structured the business to operate effectively through any environment, as we have demonstrated by our ability to continue to drive results across our business while operating through this unprecedented situation. But we've also positioned ourselves to emerge stronger, more nimble, and ready to win. Today, we will share first that we are in a very solid financial position, including over $1.1 billion in liquidity following our recent debt offering. Second, the actions that we're continuing to take to effectively manage our portfolio of assets and best position ourselves for the future, and finally, demonstrate the strength and true competitive advantage of our diverse business that has allowed us to deliver meaningful results throughout the crisis and have us positioned to drive strong results as we look ahead.
We are exiting this crisis with improved liquidity, an enhanced product line, an incredible team, and ready to pursue numerous growth opportunities we have in front of us across all of our segments. Now, before I turn the call over to Mike Eklund, I wanted to take a minute to welcome him to our team. We are very fortunate to have Mike on board. He brings a wealth of experience in financial and operational leadership and a passion for aligning all aspects of the company's finance and operations with its core business model. Mike has jumped right in and identified several opportunities for us to continue to enhance our operations and deliver improved cash flow and profitability. Following Mike's comments, I'll come back to discuss how we're looking ahead to drive strong results across our business. Mike?
Mike Eklund (CFO)
Hey, thanks, Barry, and good afternoon, everyone. It's great to be on the call today. You know, what's interesting, as I reflect back on my decision to join the Scientific Games team, I was certainly excited at the time about the multiple growth drivers across the many business units we have here. I was also excited about the clear opportunity to enhance operational effectiveness in the many things that we do. And if you do those things right, it should drive higher margins and cash flow, and I could see that from the outside looking in. And ultimately, if you do all those things, and you do them well, we should be able to create some real value for our shareholders and unlock some potential, at least that I see in the business.
What I can tell you, and I'm happy to report, is 45 days into the role, I'm more convinced than ever that I made a great decision to join the company, and I could not be more excited to be here. For some of you that may know me on the phone and from a prior life, it's probably no secret that this kind of investment thesis is exactly what I like to do and exactly what I have fun doing. And as you might imagine, right away, my focus will be on a couple of key things. Number one, delivering predictable results in everything we do. Number two, instilling a set of balanced priorities across liquidity, growth, and profitability. Number three, achieving operational excellence across the full cost structure of the firm, and then, of course, delevering.
With that, I would now like to turn to four key headlines that I saw for Q2 as I reflected on the quarter. After that, I'll give a brief update on the financial and business unit results. With that, let's jump right in and start with the headlines for Q2. First was liquidity. We have a strong liquidity position with $1.1 billion in available liquidity following our July refinancing, which we topped up by $200 million or so, as all of you know. We also exceeded the May guidance we provided for Q2, delivering a net cash outflow of -$16 million versus guidance in a range of -$70 million to -$90 million. So really nice performance by the team there. When all was said and done, our teams generated +$5 million of positive free cash flow in an otherwise extremely challenging operating environment.
So it's a great job by the teams, and we could not be more appreciative of the work that they've done. The second highlight, we completed the refinancing of our notes in 2021 as well. As a result, we have no significant maturities due until 2024. We are pleased with our timing in the market on that refinancing, and we want to thank many of you that are on the phone for your support in getting it done. In fact, the widespread support that I saw for Scientific Games was both encouraging and great to see, and again, just want to tell you thank you for that. The third highlight is the breadth of the portfolio, which really helped us balance our results for the quarter.
While we all know the gaming business was materially impacted by the widespread casino closures during Q2, the stay-at-home orders actually had the opposite effect by generating material upside for our SciPlay business, and within the digital business, on the iGaming side in particular, again, material upside. Great to see the balance of the portfolio working to our advantage in this tough market. Our lottery business also proved its resiliency and held its own for the quarter. Of course, we got off to a slow March and April, but recovered really nicely in May and June, and we see that momentum carrying over into Q3 and Q4, and we're comfortable with where our lottery business is going into the second half of the year. The fourth headline and the final headline, here our teams reduced $150 million of cash expenses in the quarter.
As we worked through a very difficult business environment, our teams were able to reexamine all aspects of the business. Importantly, we now expect a meaningful portion of these cost measures to result in permanent savings in 2021 and beyond, as the team has had to rethink the way we do business now and in the long term. Now, let's look at our quarterly P&L results. The impact of COVID-19 disruptions that resulted in temporary closures of casinos globally and a lower level of lottery ticket sales drove a 36% decline in our revenues to $539 million. The lower revenue resulted in AEBITDA declining to $121 million, which compares to $335 million in the prior year.
The $121 million of AEBITDA did include a $33 million charge in our gaming segment related to receivables and inventory valuation, and you'll see that in our disclosures. In response to the business environment, we reduced our operating expenses, as you've seen, by $122 million or 17% to $595 million. We will continue our focus on expense controls and reductions, and we'll only layer those costs back into the business as we see revenue ramping back up. Our net loss for the quarter was $198 million or $2.15 per share, versus $75 million or $0.83 per share in the prior period year. Turning to our balance sheet and cash flows, we delivered $52 million in cash flow from operations, and as I mentioned earlier, generated $5 million in free cash flow.
Our cash flow upside relative to our May guidance was primarily due to better-than-expected collections and stronger performance in some of our business segments, as we've already talked about. Our teams did an outstanding job managing the things that they largely control and delivered a $32 million source of cash from working capital improvements in the quarter. In addition, we eliminated all non-essential expenses, implemented workforce cost savings measures, and deferred all non-critical CapEx. On CapEx, it's important to say, and it was important for me as the new guy coming in, we did that with an eye towards continuing to invest in our future growth and efficiency opportunities. We will continue to proactively assess ways to streamline our cost structure and make Scientific Games as efficient as possible. Our CapEx spend this quarter was $39 million, compared to $65 million last year.
For 2020, we are now planning for capital expenditures to be in the range of $210 million-$240 million or $90 million below our original guidance for 2020. With all of these actions, our liquidity, as we've talked about, is over $1.1 billion following our recent notes offering. Finally, we ended the quarter with a net debt leverage ratio of 8.6. As a reminder, we previously amended our credit agreement to obtain relief on the net first lien leverage ratio covenant through and including Q1 2021. Looking ahead, we are committed to significantly reducing our debt leverage ratio, delivering sustainable, profitable growth, and generating strong cash flow. Now, I will quickly turn to our business unit performance, starting with SciPlay.
SciPlay revenue was up 41% to $166 million, while AEBITDA increased 80% to $60 million, driven by record KPIs across the board. It was great to see the productivity dropping through to the bottom line in the SciPlay business, for sure. Our digital revenue increased 6% to $73 million, while AEBITDA increased 67%. Again, really nice productivity dropping through to the bottom line. We continue to win deals and stand up new customers in both gaming and sports, and our U.S. iGaming revenue was up 135% in the second quarter, demonstrating the significant growth potential we have in the U.S. market as it continues to ramp. Our lottery business was down 10% to $209 million, while AEBITDA was down only 6% to $97 million.
The margin upside was driven by increased penetration of our higher-margin SGEP revenue and lower expenses. In addition, in the last four-week period, domestic instant lottery ticket sales are turning up over 20% from the prior year. Finally, we still expect to launch the instant ticket lottery in Brazil later this year. In gaming, our results were clearly impacted by global casino closures, but our team has positioned their business well, stayed focused on our largest profit opportunities, significantly streamlined the cost structure, and are continuing to innovate for our customers through contactless and cashless solutions, where we can leverage our industry-leading systems business and over 500,000 connected slots to drive meaningful revenue in the future. To wrap it all up, as we've said before, we have over $1.1 billion in liquidity and plenty of runway in our debt maturities, given our recent refinancing.
We have right-sized the business appropriately to handle the current environment, while continuing to successfully position ourselves for the future. The teams are maintaining a critical focus on controlling expenses, and we will only add that cost to the business as the results warrant. I feel optimistic that the lessons we've learned and the actions we've implemented while navigating this unprecedented environment will enable us to emerge as a more efficient business, delivering increased cash flow that will allow us to achieve all the potential I see in this business. Again, it's great to speak with all of you today. I couldn't be any more excited to be at Scientific Games and working with Barry and the talented team of leaders that he's put together. Together, we will for sure unlock the true potential of Scientific Games. With that, let me turn it back over to Barry. Barry?
Barry Cottle (CEO)
Thanks, Mike. As you heard, we have and will continue to effectively manage through this crisis, but we're also focused on current and long-term success across our business. Our focus remains on building a better, stronger, and more efficient business for the future, and we are committed to providing market-leading products and services to our customers across gaming, lottery, and sports betting, both in retail and digital. Our teams are clear on what needs to be done: win today and in the future by delivering best-in-class products, focusing our strategies, and accelerating our actions toward a more nimble and effective Scientific Games. In gaming, we are controlling what we can control by reducing our cost structure to create a leaner and more efficient organization, while also building out strategic long-term growth opportunities to drive greater share of wallet today and as we continue to emerge from the current crisis.
The team is focused on several areas, including North American premium, premium gaming operations and North American outright sales segments, and commercializing products that innovate for our customers, drive operational efficiencies, and provide significant revenue opportunities. For premium gaming operations, the team is working to grow the segment with a focus on driving commercial excellence with our top franchises, including the number one WAP game in the market, Dancing Drums Explosion. To expand placement opportunities with Dancing Drums Explosion, customers may now select between three different cabinets, which includes the TwinStar V75, TwinStar Wave XL, and now TwinStar J43. To drive replacement sales within the North American sales segment, the team is focused on developing core products that will deliver proven content and competitive pricing with affordable hardware options.
The recently launched TwinStar Matrix and TwinStar 5-Reel Mechanical have strong content roadmaps for both for-sale and gaming operation segments. We are bringing a number of classic titles forward to build customer confidence around our content portfolio, while also providing flexible pricing options for our customers. We have also accelerated technology and products across cashless and contactless solutions that are gaining significant traction in the market as a result of COVID-19. Taking a mobile-first approach, the Unified Wallet product is powering a cashless gaming experience by giving players the power to instantly access funds to play slots and tables through a mobile app. Cashless solutions will help keep both team members and guests safe, and it's also cost-effective for casino operators.
We have also developed the social distancing and automated game sanitation modules to support our customers by automatically enforcing social distancing among slot players, allowing players the access to reserve their favorite game during their visit, and eliminating the manual task of searching for games that need to be sanitized by automatically identifying these games. These solutions are creating significant revenue opportunities for us and solving problems for our customers. In addition, the pipeline and interest for the electronic table games segment remains strong. Sales have more than doubled in the past quarter, and the order pipeline has seen a 3x demand increase since March. Quartz Hybrid launches in Q3 to further enhance the player experience within this product line.
Finally, the team continues to drive organizational improvement, reduce our cost structure, and we're excited to have recently welcomed Melissa Price as our new Senior Vice President of Global Gaming Operations, as we continue to attract and retain the best talent in the industry. In our lottery group, we're seeing significant improvement in performance in recent weeks as the U.S. instant product sales are surging. In fact, the U.S. lottery market is up over 20% for instant game retail sales in the most recent four-week period versus last year. We also continue to demonstrate an exceptional win rate on contract rebids, as evidenced by our recent renewals in multiple U.S. states and two recent internationally in Germany. As a reminder, following our elevation to primary supplier in Connecticut, Scientific Games is now the primary supplier to all 10 of the top-performing instant game lotteries in the world.
Building on the momentum we've seen across our instant games business is the outstanding results we're seeing in our SGEP program. States on the SGEP program outpaced industry sales growth by over 40%. In fact, Ohio switched to the SGEP program in July 2019 and has seen a 13% increase in ticket sales in their first year. Five of the top ten performing lotteries in the world are SGEP partners, and we see continued opportunity to convert additional states to this program, where we provide a full instant ticket category management program across product solutions, advanced logistics, retail optimization, and digital engagement. Speaking of digital within lottery, our iLottery solution is continuing to deliver outstanding results with the Pennsylvania Lottery.
As you know, our iLottery launch in Pennsylvania is the most commercially successful iLottery launch in North America to date, delivering total sales of $1 billion in under two years, and is now on track to deliver over $1 billion in sales annually. We continue to expect to see iLottery adoption accelerate across states, and we're incredibly well-positioned to benefit from these rapidly increased adoption levels. In our digital segment, we have significant momentum as we expect to announce another big partnership win in the very near future. We delivered four key launches over a four-week period in June, with two additional partners in the process of launch. This type of velocity demonstrates our significantly improved speed to market capabilities. We launched Betfred in Colorado, sports for the NLO, the Dutch Lottery, which is a takeaway from a competitor.
FireKeepers in Michigan, the first tribe to launch in the state, demonstrating our market-leading position as the state begins operations, and we relaunched Danske Spil on an improved tech platform. I would note that Danske Spil and the NLO win demonstrate the power of OneSG and our long-standing partnerships with these World Lottery Association operators. As we look ahead, we'll be launching sports with Golden Nugget in New Jersey and iGaming and sports with Golden Nugget in Pennsylvania and Michigan, and we are thrilled to support Golden Nugget as they look to significantly accelerate their digital business across the U.S., especially in light of their public listing plans, and in Michigan alone, we are extremely well-positioned between Golden Nugget, FireKeepers, FanDuel, and others who we are discussing our full suite of products with, and we expect all operators in the state will utilize our gaming content.
As we've discussed before, the iGaming and sports markets are expected to grow at incredible rates across the U.S., with iGaming expected to grow at a compound annual growth rate of over 65%, and sports expected to grow at an over 50% rate. In fact, if you take New Jersey iGaming revenue and project out to a mature U.S. iGaming market, it implies a $22 billion GGR opportunity in the U.S. for iGaming alone. And our partner, Golden Nugget, is targeting 10% share of this over $20 billion market, further highlighting our vast potential. Looking at recent results across New Jersey, we held 44% market share, and our iGaming revenue in the state was up 113% versus last year.
With our unmatched OGS platform and market-leading position in North America iGaming, no one is better positioned to take advantage of these expanding market opportunities, where we can leverage our position to be the preeminent player in future iGaming expansion. In sports, we are set for a second-half recovery and are seeing significant demand within returned events such as European soccer leagues and racing. In fact, we saw a 44% year-over-year increase in bets placed on Royal Ascot day one. Our technology helped pioneer sports betting nearly 20 years ago and carries with it a platinum-level reputation for scalability, reliability, and robustness. We are the worldwide leader in delivering sports technology and systems to regulated markets. We drive over 60% of the bets in the U.K., are leaders in many other regulated markets, and are positioned to be the number-one supplier in the U.S. market.
Finally, with SciPlay, we produced record results in the second quarter. We delivered significant and compelling enhancements to economies, game quality, and live ops across our portfolio that allowed us to truly capitalize on the surge we've seen in player demand. As a result, we generated record quarterly revenues of $166 million, up 40% to last year, and our AEBITDA increased 80% to $60 million, also a quarterly record. ARPDAU increased 40% to $0.67. Average monthly revenue per payer increased nearly 25% to $1.0113, and payer conversion grew 80 basis points to 6.8%. All of these KPIs represent record levels and demonstrate the incredible position all of our games are in.
In addition to these great results, we also acquired casual game developer Come2Play during the second quarter, adding a new genre of evergreen casual games and an incredibly talented team to our portfolio. It immediately expands our market beyond social casino apps and enables us to leverage our unique technology and strategies to drive player engagement and grow revenue. We are excited about our record-breaking results in the second quarter and for our future, given the strength of our games and the untapped growth opportunities we have ahead of us. In closing, we are in a very solid financial position, and we're continuing to effectively manage through this crisis and best position ourselves for the future.
We are moving forward with improved liquidity, an enhanced product pipeline, an incredible team, and we're ready to pursue the numerous growth opportunities we have in front of us across all of our divisions. Now, before we turn to Q&A, I want to quickly address the recent filing from our shareholders, MacAndrews & Forbes. We expect to work cooperatively with MacAndrews & Forbes, as we always have, as it considers the sale of its SG shares.
... The sale consideration is at a very early stage, and therefore, we have no additional detail to provide at this time and will not be commenting further today. We will provide updates as appropriate, and want to assure you that this process will not affect our business planning, decision-making, nor day-to-day management in any way whatsoever. The leadership team will continue to run the company and report to the board. With that, we are happy to take your questions. Operator, could you please open the line for questions?
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from John DeCree with Union Gaming. Please go ahead.
John DeCree (Director and Head of Institutional Research)
Hi, Barry. Hi, Michael. Congratulations, guys, on the quarter. I don't think we'll see too many results from our sector that have positive EBITDA and free cash flow, so congratulations on that, and Michael, it seems like you picked a good time to start, so we welcome you Scientific Games team.
Mike Eklund (CFO)
Thanks, John.
John DeCree (Director and Head of Institutional Research)
Thanks, John. Lot of good stuff to talk about, Barry, so maybe I'll just kind of start high level, and kind of get your thoughts on long-term strategy as the world is kind of changing on us in real time. So a number of your business segments are really shining here. You've highlighted most of them, I think, in your prepared remarks, whether it's iLottery results, demand for electronic tables, of course, SciPlay and iCasino. I wanted to get your view on kind of how sustainable some of this demand is on the other side of the pandemic, whatever that kind of new normal might look like.
We're obviously experiencing a lot of growth right now, but, what would be your thoughts and views on, the growth or at least this level of business demand sticking around, you know, whenever we get to, hopefully, the other side of this pandemic?
Barry Cottle (CEO)
Absolutely. Thanks, John, and I think there may be two questions there. So let me tackle first the SciPlay digital piece of this, and then talk a little bit about kind of the note on long-term your comment on long-term strategy. So first of all, you know, as you noted, we certainly saw benefits in SciPlay and digital from the stay-at-home dynamic. However, it's important to note that we had our games at SciPlay in incredible shape going into that, and also being on the forefront of digital gaming allowed us, obviously, to truly capitalize on the surge in player demand as well. I think it's also clear that I think the current environment has created significantly higher baseline for these businesses going forward, given the, you know, the rapid player adoption of digital that we've seen.
I'd also note that if you take a look at iGaming, that market has grown in recent years, in New Jersey, along with the land-based market. So we think digital has, you know, continued to have, you know, a lot of, you know, strong growth ahead, as does land-based gaming, and they can grow in tandem. We've seen this in New Jersey and obviously in Pennsylvania with iLottery. So we expect both of these businesses to continue to drive meaningful growth. You're going to see growth in the addressable market, growth in consumer adoption, growth in products, games, features, and, you know, we think it's a very healthy business in which we have a really strong position in.
And then in terms of our long-term strategy, I would say I feel as confident today as I ever have about the positioning that we've created in our go-forward strategy. In fact, quite frankly, what's happened is it's really reaffirmed to me the strength and competitive advantage of both our team and the diverse portfolio of businesses we have. We structured the business to operate effectively through the environment, and our leadership position created a lot of opportunities to deliver profitable growth today and sets us up nicely for the future. So as you mentioned, our digital business, we lead the iGaming market today, and in this past quarter, delivered 135% iGaming revenue growth in the U.S. in this quarter alone.
And then if you look at the, you know, the momentum that we have on the deal and launch front on sports just reinforces our leadership position there as well. I don't think anyone is as well positioned as we are today or in the future to take advantage of the rapid growth that I think we're going to see in those markets. On the lottery front, as Mike alluded to, we're not only well positioned, but also that business is so resilient, as we saw in Q2, and we're now seeing, you know, the instant ticket sales increase significantly.
And if you look ahead, you know, we're positioned to take advantage of new territories, such as a Brazil launch or, and the unprecedented bid winning streak that we have now, the acceleration, in adoption of iLottery, and then the broader adoption of the SGEP program, where we manage the full lottery solution. So, you know, really strong kind of play there on the lottery side. On SciPlay, as we mentioned, you know, record growth, in the quarter of 40%, which is 2X the market rate, and an EBITDA 80%, which shows the leverage that we have in that business as it scales. And then add on top of that, the recent acquisition of Come2Play, we're now expanding beyond social casino into the casual game market, which again, enables us to continue to accelerate and grow that business going forward.
In gaming, we have an amazing team, just laser focused on driving greater share of the customer wallet through a really compelling product roadmap and commercial approach, both during and post-COVID, while becoming leaner and more efficient with the business. You know, as you know, we can't control or predict COVID, but we can impact our market share, and we can impact our cost structure. And so we're extremely confident in Matt and team's ability to deliver profitable market share growth in the quarters ahead....
When you look at all that, and on top of this, teams reducing costs across the board, enhanced cash flow, and creating a more nimble, efficient business overall, we believe that just enables us to be in a really nice position competitively and achieve our full potential and deleverage the business and generate strong results for all of our shareholders.
John DeCree (Director and Head of Institutional Research)
That's helpful. Barry, I think you answered multiple questions in there, given there's so much to talk about. But if I could sneak one short follow-up in, you've been talking a little bit about some additional partnerships on the digital front that might be on the horizon, and realize you probably can't specify who or how far along those are, but could you kind of qualify what a big partnership might be for you? Is it a kind of multi-jurisdiction partner or, you know, does it go across iCasino and sports? What would be a kind of big partnership in your eyes, if you could qualify?
Barry Cottle (CEO)
Yeah, look, I think that's fine. I think, you know, as you just alluded to, and I also appreciate you highlighting the momentum we're having right now in both the deals as well as the launches. I think we had four launches in the last four weeks and another two imminent.
We do have, you know, on the OpenBet side or the sports side of the business, it's, you know, we had told everybody our playbook was to replicate our success that we had in the UK by delivering the best, you know, most reliable, proven, scalable, and customizable product, and over time, everybody's gonna gravitate toward that, and we're seeing that happen in the US, as people who had made original choices for somebody else are now switching over to us as they want to scale up. And then I think that's worked out really nicely.
On the iGaming front, our OGS platform, which is kind of the Netflix, I would say, of the space, where we have a very rich, you know, kind of feature-rich platform that attracts, you know, the top, you know, content studios that we bring to market in addition to our own IP, we can offer that as well, and so it becomes kind of a must-have for people, you know, operators entering that space. We do have, you know, deals that we're not announcing today, but that are in the pipeline and imminent, and I think as you alluded to, kind of yes to all of the above, multi-jurisdictional, et cetera.
So we're happy with the, you know, the momentum we're seeing in that side, and, you know, as I said, fortunately the playbook that we had in place seems to be playing out.
John DeCree (Director and Head of Institutional Research)
Great. Thanks, Barry. Thanks for taking all of my questions. I'll hop back into the queue.
Operator (participant)
The next question is from Barry Jonas with SunTrust. Please go ahead.
Barry Jonas (Director)
Hey, guys. Hey, Barry. Welcome, Mike. I had a few questions, wanted to start with the gaming segment. Just curious what you're hearing now as you speak with customers versus when the pandemic first really hit. You know, when do you think customer budgets and purchasing levels could go back to pre-COVID levels?
Barry Cottle (CEO)
Yeah, that's a great, it's a great question, obviously, a challenging question, just given, you know, the state of where we're at, in terms of, you know, COVID and the like. I guess the way I would answer it is this, you know, look, there's a high degree of uncertainty, so everything obviously has to be, you know, caveated. However, you know, based on, you know, the conversations we're having, you know, we do expect to see more normalized level of spend next year, and we do believe the gaming business will grow meaningfully in 2021.
You know, if you look at kind of the view of the impact and recovery that we're seeing in the market today, we've got roughly 85%, let's say, casinos open, and the early results are actually very encouraging. When you see Coin-in on a per-day basis, actually up significantly for the units that have been turned back on. So the initial consumer demand you know seems to be there, and that seems to be moving forward. You know, in terms of... That's how I would kind of describe the market per se.
In terms of us, in particular, I think we're very fortunate in the sense that our exposure is largely tribal and regional, so that's 95%, and we believe that the recovery in that space actually will be faster because you don't have the contingency on travel and tourism. It's, you know, it's very much a local, you know, local-driven markets. And so, you know, we're always cautious, but we're encouraged, I would say. And so, you know, as I mentioned before, we can't, you know, we can't control or predict COVID, but what we can do is make sure our cost structure is set up appropriately and make sure we have the products and services lined up, ready to take the greater share of wallet that we can when it does.
Barry Jonas (Director)
That's really helpful, but maybe just to drive home that point a little bit more, we're certainly seeing instances in some of the regional markets of second waves of cases. I'm just wondering, as you look at some of your real-time participation data, or maybe even on the lottery side, actually, are you seeing a tail off there, or are those businesses holding despite any second waves?
Barry Cottle (CEO)
Yeah, so a couple things first. So when you talk about the second wave, what we've seen actually is there have been, you know, remember, there's close to 1,000 casinos, you know, opening up over the course of the country. We've only seen a few, you know, two to three, that the casinos have closed, basically temporarily, but reopened obviously in, you know, Arizona, Oklahoma, and, you know, they've closed for a day or two, you know, sanitized and reopened. But we're still seeing the momentum of people, you know, cautiously continuing. I think what people are... The, at least what we are seeing and coming out in our discussions is people ensuring that they're taking the right social distancing, sanitation measures that will help them stay open and grow.
And obviously, you know, I can, you know, we've been, you know, with the systems leadership position that we have, we've taken it upon ourselves to really try to come in with a set of products and services that will enable our operators to continue to do that. And we've created, you know, both the, obviously, the cashless and cardless, which we have in the market now and ready and available. But we also set up some, you know, sanitation and system type of products that enable people to turn on different machines, keep to and off in order to keep people socially distanced. We're actually testing some surface and topical things.
And so the goal here is to try to keep that momentum going and leverage our, you know, our systems position in order to give people tools in order to do that safely. Because the goal is obviously, you know, the other thing we can, you know, we can impact during this COVID time, besides the wall and the cost structure, is we wanna make sure we ensure our employees, our customers, and our players are safe, right? And we always keep that very high on the list as well.
Trent Kruse (SVP of Investor Relations)
And Barry, this is Trent. I just would add to your point on lottery. You know, we called out the surge in instant ticket growth here over the last four weeks, but that's been transpiring for longer than those four weeks and has been very consistent. So, you know, we are seeing those encouraging trends, and to Barry's point, we're innovating for our customers, you know, at this point in time as well.
Barry Jonas (Director)
That, that's great to hear as well. So just the last one from me, maybe to get Mike into the fray. You know, appreciate the remarks about the leverage from here, but any levers you would consider to sort of accelerate that, whether it's asset sales, equity issuance, spin outs of a division? Just curious to get any high level thoughts there.
Mike Eklund (CFO)
Yeah, my initial reaction is it's a little too early to tell. But, you know, clearly, Q2, Q3, with all the uncertainty in the market, our approach has really been, "Look, let's control what we control in this environment." In this environment, we control the health, safety, and wellbeing of our team members. We control keeping our customers satisfied with products, innovation, what they need, when they need it. We kind of control cost, and we control working capital. Frankly, all of our attention has really been on that, and Q2 was really, you know, kind of a prepare for the worst, hope for the best posture. As we go into Q3, which is really where our focus is now, it's kind of cut over to cautiously optimistic for all the reasons that Barry said.
We see encouraging trends with, you know, kind of tribal and regional casinos around. The digital, the SciPlay business are doing well. Lottery, as Trent said, you know, a pretty tough March and April, but May and June, kind of bouncing back, recovering really nice. We feel great about the momentum there. And so as those things start to stabilize, we're kind of postured either way we need to go. If things open up, we're gonna lean in heavy and fast, and we're ready to go. If they tighten back up, we'll tighten back up with them, and we've already got the cost controls in place. We've got the liquidity in place. We've got the headroom from a cash flow in place.
So really, a lot of the focus up to this point, frankly, has been, let's just get things stabilized given the environment we're in and the reality of where we are. Again, tough environment, but feel great about the work that the team has done. It's been really impressive to see. You know, coming in new, I can tell you this, just from the outside looking in, I feel really good about the house of brands that we've put together. I feel really good about the leadership team that Barry has put in place. And, you know, my interactions with all of them so far have been extraordinarily positive, hardworking, focused, dedicated, really leaning in on the right topics. You know, clearly, when you look at the business with a new set of eyes from the outside in, I see opportunities in the working capital cycle.
There will be a lot of focus on liquidity, cash flow, payables, inventories, receivables, just leaning all of that stuff out and really making sure we get the best out of it. It's a little too early to tell you exactly. I have some hypotheses that we're gonna work through over the next 90 days. When you look at the way the company came together with a lot of acquisitions over time, you know, a lot of things get left behind in terms of synergies, effectiveness, integration, et cetera. You know, when you look at things like automation, digitization of everything we do internally, just like we do externally, I see a lot of opportunities there. So, you know, as we get ready for 2021, we kind of get out of the rush of the environment we're in now.
The leadership team and I have had a lot of conversations around, you know, what does 2021 look like, and what does the next three to five years look like? You know, taking advantage of the growth in the marketplace and continue to invest where we need to invest, but then also making sure that we're self-funding a lot of that and delevering at the same time, are really getting after cost, really getting after working capital, really getting after liquidity in a meaningful way, and so yes, I see opportunities there. We've got to vet some of those out over the next 90-120 days, but I think, I think we'll have a whole lot more to say about that going into the new year, but I'm encouraged by what I see and the opportunities I see out there so far.
Barry Cottle (CEO)
Yeah, this is Barry. And just to add on to what Mike said, just real quick, it's just as Mike said it, I think we set ourselves up to operate the business in a way that it can, you know, generate cash and manage through this environment. So we don't need to do the asset sales. We've obviously got an amazing strategic, valuable asset in SciPlay. We have an amazingly strategic and valuable asset in our digital business, and we think that there's strong strategic value in these. They have great futures and growth, and synergy within our businesses with, you know, brands, distribution channels, and the, you know, player convergence that come along with it that make Scientific Games actually uniquely a competitive advantage.
All that said, you know, we always look at and explore ways to enhance value in the interest of all our shareholders, but it is more of looking at it as an opportunity, as opposed, and staying out of it, as opposed to a need.
Barry Jonas (Director)
Really helpful. Thank you so much, guys.
Barry Cottle (CEO)
Thanks, Barry.
Operator (participant)
The next question is from Brad Boyer with Stifel. Please go ahead.
Brad Boyer (Gaming Analyst)
... Hey, thanks for taking the questions, guys, and congrats on a solid quarter. First question for me, I appreciate all the color around the nongaming segments and all the momentum we're seeing there. But you know, still kind of look at it and say, you know, gaming still is your largest segment. And I was hoping you could provide a little additional color, Barry. You touched on it a little bit in some other answers, but just a little additional color around what you're doing today to ensure that you maintain your position in the gaming segment and in the gaming market in these unusual times. Any additional color you could provide around that would be helpful.
Barry Cottle (CEO)
Yeah, I mean, absolutely. I think, you know, first, yeah, I would put it in two buckets. One is, you know, ensuring that we have the right cost structure and efficiency in the organization to compete, not just through COVID, but when we come out of it, so that as the market starts to recover, we can invest in the right things. And, you know, Matt and his team, you know, actually walked in the door right when COVID happened, and, you know, things and plans that they had, you know, had thought, you know, had mapped out that they wanted to do, you know, accelerated, quite frankly, you know, in COVID.
And, you know, it was an opportunity for us to make this division as efficient as possible, you know, so that we could, again, invest in the products and services we believe will win. And I think they've done that. And so the second piece is obviously winning the greater share of the wallet. And so, you know, the things that they have done is, you know, going after, you know, great products, right? So, you know, in the unit sales space, we launched two, you know, value-engineered cabinets that just recently in the marketplace with, you know, the Matrix and the five-reel mechanical. We lined them up with really strong classic titles, new versions of classic titles.
We also developed, you know, commercial incentives around them, and a commercial strategy with our operators to partner and be flexible in a way that we can, potentially take share as their CapEx starts to come to fruition. On the game ops side, very similarly, we took our top-performing franchises, like Dancing Drums, et cetera, you know, improved, you know, the game performance. We, you know, we've launched them with another, you know, with a- we're launching them with a new set of, you know, platform-agnostic, cabinets, as well as some new coming to market, again, with certain, you know, segment pricing and things to go after the market and attack it in the most strategic spaces. So a streamlined product roadmap with higher quality product, with really strong commercial execution and operational efficiency.
And then, we looked at the market and said, "Okay, what does COVID present, that we believe will occur during COVID and after?" And, that brought us to things like the electronic table games market, which we mentioned before, which, you know, is, you know, a really strong product line that we've put a lot of emphasis in, in getting to market. We already have a significant share in this space, but we're seeing, more demand than we've ever seen. And then the systems products that I mentioned before in terms of, you know, accommodating COVID, cashless, cardless. And so creating products that we believe the market needs, and then just streamlining our products with higher quality games and, and, you know, driving operational efficiency in the organization.
Matt and his team have come in and done a stellar job of going after that, in a challenging time, and I think that sets us up for profitable growth now and going into the future, where we're gonna take market share.
Brad Boyer (Gaming Analyst)
Okay, that's helpful. And then my second question is, you know, in light of some of the recent combination activity in the sports betting world, from a technology perspective, I think there's been this narrative out in the marketplace that, you know, more B2C operators are ultimately gonna wanna own their platforms outright. Could you just provide any, you know, perspective on that in this public forum from your perspective and just, you know, any conversations you're having with clients would have you know, is that train of thought from your perspective, misguided? Just any color you can provide on that would be helpful.
Barry Cottle (CEO)
Look, I wouldn't say, not sure I would say the word misguided, but I don't think that captures what's exactly going on in the marketplace today. We see it both ways, and in fact, if you look at historically in the UK market, what you'll find is the opposite happened, right? So majority of the players in the UK market, at some point in time, made attempts to run their own platform and then realized that they'd rather have a robust platform that's scalable and customizable, and use that as a competitive advantage, and focus on what I would call kind of the more customizable consumer, close-to-consumer type of technologies and capabilities. And so I would say we're seeing a mix of that in the United States.
As much of some folks trying or going down that path, we're seeing also a counter to that, of people walking away from their platforms and integrating ours. And so I think, you're seeing a balanced approach. I do think the bulk of the market will ultimately be supplier driven, as opposed to B2C-owned. And the other thing that we're doing is very similar to what we did in the iGaming space, is providing value-added services on top of the platform itself, right? And so in a very similar way that we have the OGS platform, we just opened OpenMarket, which basically plugs in the best of best-in-class third-party sports betting products and tools into our platform, that one integration, they get everything.
We're continuing to go up the value chain with Don Best and others to provide value-added services that are unique to the platform that we provide. So, it's out there, so I don't, you know, again, wouldn't use it misguided, but it's not a clear trend. It's actually more of a balance, and the broader, longer-term trend, we've actually seen go the other way.
Brad Boyer (Gaming Analyst)
Perfect. Thanks for the very thorough answers, guys. Appreciate it.
Barry Cottle (CEO)
Thanks, Brad.
Operator (participant)
The next question is from Chad Beynon with Macquarie. Please go ahead.
Chad Beynon (Managing Director and Analyst)
Hi, afternoon. Thanks for taking my question. Might be too early to ask this, but since you've certainly made greater strides in the quarter than I think most of us thought, do you have any medium-term leverage goals? I know before that was something you were really focused on, and given that you're kind of running through budgets, are you willing to share maybe what a 2021 or 2022 leverage goal could be?
Mike Eklund (CFO)
Yeah, Chad, this is Mike, and I'll let Trent jump in here, too. I think you kind of hit it there. It's a little too early to say. You know, the reality is Q2, Q3 has been around making sure we're positioned to deal with whatever happens in the marketplace around us, right? Let's get the maturities moved out. Let's get liquidity topped up. Let's get after cost. Let's get after cash. Let's make sure that we've got the financial well-being and health of the firm, you know, firmly in place, and we do right now. We feel good about that. We're kind of in a wait and see like the rest of the market now as to where this thing is gonna go. Is it gonna continue to move forward? Is it gonna retrench to some of the questions that we're at?
As we said, we've got pretty good, you know, encouraging signs in the marketplace that things are inching forward, and we're gonna prepare for that. But we've kind of held off on any long-term goals right now until we just have a little better line of sight what's gonna happen in Q3. So as that firms up and we get into our planning for 2021, and we've got a better idea of where things go, we'll get a little bit more declarative on that front. But obviously, to Barry's point, if we got digital growing, we've got cash flow improving, we've got costs coming down, we've got lottery holding its own, you know, we've got a lot of good momentum. As all those things happen, they generate cash that help us with that equation that you're referring to. And so it's clearly in our line of sight.
It's a top priority. There's no scenario where it's not gonna be my top priority in the firm, but it's a little too early to say right now.
Chad Beynon (Managing Director and Analyst)
Okay, makes sense, and then regarding SciPlay, the metrics, particularly ARPU, was very strong, and I'm sure you guys will get into this on the SciPlay call. It certainly kind of confirms that your monetization teams are doing better, and you acquired Come2Play, which I think is an interesting acquisition, and it gets you into the casual game space that doesn't have as strong monetization. Small acquisition, but given that you guys are doing so well, do you think casual games could become a bigger opportunity for you, given everything that you've learned and your successes in terms of monetizing games, and given that the pool of games and customers is significantly larger than the current pool for casual casino? Thanks.
Barry Cottle (CEO)
Yeah, absolutely. I think the playbook here is to look for companies that we believe in the game and the game teams. These casual, you know, puzzle, card, board, this light skill mechanic, you know, with very simple gameplay, very similar to a slot. We plug it into our monetization machine. We create metagames on top. We create monetization loops. We create social loops. We improve their UA. It's the exact same playbook we used for Bingo, which tripled that business. And the goal is to come in and find people who really understand and know a core mechanic and do it really well. In this case, the solitaire game, which we really like.
And then we layer on our knowledge and expertise with them to go, you know, to build that category. And you're exactly right, the, you know, the casual game space is bigger. It tends to be less monetized, but that's where our expertise is, taking these simple loop games and figuring out and building the metagame around them in order to get that monetization. And so, you're exactly right, and we're very excited about it and the team that we got there. And
Trent Kruse (SVP of Investor Relations)
Chad, this is Trent.
I would just simply add to that point on monetization, you know. They do run some ad-based business, and so this is gonna give us a chance to look at and learn, you know, in that space as well, which could create another avenue for growth, you know, for us down the road.
Chad Beynon (Managing Director and Analyst)
Thanks, appreciate it. Nice results, guys.
Barry Cottle (CEO)
Thank you.
Mike Eklund (CFO)
Thank you.
Operator (participant)
The next question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.
Ryan Sigdahl (Senior Research Analyst)
Thanks, guys. Good afternoon, and congrats on the good results in a challenging environment here.
Barry Cottle (CEO)
Thank you, Ryan.
Mike Eklund (CFO)
Thank you.
Ryan Sigdahl (Senior Research Analyst)
Just want to dig in a little bit more, if you can say, on the new customer that's coming. Is that a new digital customer, or is that an expansion with an existing operator? And then is that a new online participant, or are you displacing someone else, another supplier?
Barry Cottle (CEO)
Yeah, so basically what we're seeing is when people were, you know, forced to work from home, they had to learn and adopt the new way to, you know, to do the things that they loved, right? So we're seeing, you know... I would say it's both. We're seeing new players come into the space, you know, that and getting comfortable with digital and mobile, you know, gameplay, and I think that just expands the addressable market. In addition to that, because your phone is on you 24/7, you know, we're also seeing frequency of play, you know, happen as well. Whereas, you know, if you have to get up and drive to a land-based-...
entity, you know, to make a bet or to play a game, you know, there's a barrier or friction there. So, we're seeing both. We're seeing frequency of play, frequency of spend, and then we're seeing new people come in that, you know, into the market.
Trent Kruse (SVP of Investor Relations)
Ryan, just to your point on new deals in the future, you know, it's both. It's on the iGaming and sports side, and as Barry alluded to earlier, you know, multi-jurisdictional. So, yeah, certainly some exciting things on the horizon. Yeah.
Ryan Sigdahl (Senior Research Analyst)
Yeah, maybe just to be more clear, the new customer that's coming for digital that you talked about in your prepared remarks, is that an existing digital customer that you're expanding with, or is that a brand new operator that you're adding?
Trent Kruse (SVP of Investor Relations)
Ryan, it's Trent again. You know, it is an addition, but we really can't say anything more beyond that today, but we will have, you know, an announcement soon.
Ryan Sigdahl (Senior Research Analyst)
Got it. Moving along, one more for me. So on the casino customers that have reopened, so partial capacity, what have you seen from their machines? Which ones are they turning on? Is it, you know, their own machines, or is it the premium leased? And then how are your machines comparing versus competitors?
Barry Cottle (CEO)
So it, you know, I think most of them are balancing the space. And so I would say ultimately, it's really balanced, quite frankly, is what we're seeing in terms of the, you know, what machines are getting turned on. I will say, you know, a lot of, you're seeing a lot of, obviously, gravitation toward familiar big franchises, which plays well into our world, right? With the franchises that we have are well known. It's kind of like when, you know, when we, you know, when your restaurants all got, you know, turned off, or, you know, shut down and all the, you know, restaurants came back open, everybody... You didn't go to a brand-new restaurant, you went to the restaurant that you, you know, loved and missed the most, right?
And so, you know, in a lot of ways, the same thing happens here. And the great news is we've got such great, you know, traditional plethora of franchises that are out there in the marketplace. And, you know, as I mentioned earlier on, you know, we're seeing significant coin-in on an active machine, you know, above and beyond what we, you know, would normally see. And, you know, so the balance of that tells us that, you know, that we're really doing well. We can't point to competitively yet. There's no reports out there that will, you know, that, you know, would give me any credibility on that. But we're encouraged by the results, I'll put it that way.
Ryan Sigdahl (Senior Research Analyst)
Great. Thanks, guys. Good luck.
Trent Kruse (SVP of Investor Relations)
Thank you.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Barry Cottle for any closing remarks.
Barry Cottle (CEO)
Hi, all. Thanks for joining us today. We really appreciate your support, and I'm very pleased with the actions we've taken in the second quarter with a successful note offering and implementing cost-saving measures, while continuing to operate effectively for our customers. The diversity of our businesses and being on the forefront of digital gaming was critical to allow us to successfully navigate the worst of this environment. We have the right team, coupled with the best products across both land-based and mobile gaming, to position us for the future profitable growth. Thank you very much.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
