Participants

Lorne Weil; Executive Chairman; Inspired Entertainment, Inc.

Brooks Pierce; President & CEO; Inspired Entertainment, Inc.

David Bain; Analyst; B. Riley Financial, Inc.

Chad Beynon; Analyst; Macquarie Research

Ryan Sigdahl; Analyst; Craig-Hallum Capital Group

Presentation

Operator

Good morning, everyone, and welcome to be Inspired Entertainment fourth quarter 2023 conference call. (Operator Instructions) Please note that today's event is being recorded.
Please refer to the company's Safe Harbor statement that appears in the fourth quarter 2023 earnings press release, which is also available in the Investors section on the company's website at www.inseinc.com. This Safe Harbor statement also applies to today's conference call as the company's management will be making certain statements that will be considered forward-looking under securities laws and rules of the SEC.
These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties and changes in circumstances. In addition, please note that the company will discuss both GAAP and non-GAAP financial measures. A reconciliation is included in the earnings press release.
With that completed, I would now like to turn the conference call over to Lorne Weil, the company's Executive Chairman. Mr. Weil, please go ahead.

Lorne Weil

Thank you, operator. Good morning, everybody. Thanks for joining the fourth quarter conference call. With us this morning are our CEO, Brooks Pierce; Interim CFO, Marilyn Jentzen; and VP of Corporate Development, Eric Carrera. Brooks, as usual, we will make prepared remarks and Marilyn and Eric are available to answer questions when we go to the Q&A section.
Since this has only been a few weeks since our last call, there's not a lot new to report. And accordingly, I'll make my remarks fairly brief.
In a moment, Brooks will talk in some depth about the key developments that will be driving our progress over the balance of the year. Fourth quarter EBITDA at $26.5 million was in line with previous consensus in modestly ahead of 2022 as well as full year EBITDA of $100.5 million. Full year EBITDA from our overall digital business comprising the Virtual Sports and Interactive segments grew by 12% from $56.2 million in 2022 to $63.1 million in 2023, while maintaining EBITDA margins of 75% from year to year. No small feat given the competitive environment that we participate in.
Let me mention here. Later on this morning, we will be filing the 2023 10-K and so anyone who wants more detailed information beyond what's in the press release, that will be available, I'm guessing probably by no later than noon.
Within the Digital business, there were some interest in cross currents. The Interactive business accelerated throughout the year, hitting revenue growth of close to 50% in the fourth quarter. At the same time, somewhat paradoxically, growth in Virtual Sports moderated over the course of the year. I think the peak EBITDA in the Virtual Sports was the first quarter of 2023.
The explanation of this apparent paradox has to do with the relative market share of the two businesses. In the Interactive segment, there are many competing suppliers. So even when there are no new markets opening, there is significant opportunity to grow the business via increased market share, and this was very much the case in 2023, driven by steady production of new superior content and an increasing commitment to worldwide account management.
In a moment, Brooks will talk about the dynamics in more detail, including expectations for our new Hybrid Dealer product, which has performed extraordinarily well.
Conversely, our market share in the Virtual Sports business is considerably higher. So absent the opening of new markets, the opportunity to grow market share -- excuse me, to grow volume market share gain is somewhat constrained. New markets are, in turn, driven by a combination of the favorable regulatory climate and the development is important in game-changing new content.
Here again, Brooks will elaborate and why we think the markets of both North and Latin America are at an inflection point, driven by new products such as the NBA and NFL games as well as additional sports licensing deals on the horizon. And indeed, we're seeing in the first quarter, Virtual Sports EBITDA ticking up a little after having been flat or slightly down for a few quarters.
Lastly, I should mention that is clear from the earnings release, our retail businesses continued to perform well and benefit from tailwinds from both the new Vantage cabinet, which again, Brooks will elaborate on in a moment and new market opportunities in North America.
And with that, I'll hand it over to Brooks.

Brooks Pierce

Okay. Thank you, Lorne. And as I usually do, I'll go into a little bit more detail on the segments of our business and we'll also give an update on some of the products that have launched recently and the plans for rolling them out across 2024.
Our Interactive business continues to perform strongly and across all geographies, with both the UK and North America showing excellent growth quarter over quarter. Overall, our interactive revenue for the fourth quarter was up nearly 50% year over year and up 10% quarter over quarter. Fourth quarter is usually a strong quarter for Interactive, particularly with our strong portfolio of holiday-themed games.
And this quarter was no exception, with strong titles like Cops 'n' Robbers Big Money Christmas and Santa's Winter Wilds. Inspired is becoming known as a leading content provider of all seasonal games. As we are reporting after our Q1 2024 has already completed, the strong momentum in our interactive business continues. And just last week, we had the highest revenue week in our history.
Our roadmap continues to be very strong throughout the first half of the year, and we're looking forward to expanding our presence in Latin America and particularly Brazil throughout 2024. We're very encouraged about the early progress we're seeing with our Hybrid Dealer product that will be reported as part of our Interactive segment going forward.
Although at this point, it's early days with only our Bonus City product being launched with BetMGM and only in New Jersey, we are seeing excellent growth in turnover, GGR and active players and hit new highs on each of those metrics last week.
BetMGM has been a great partner for this launch and have designed a compelling marketing program to support the launch. And we're anxious to get this product out in more markets with both BetMGM and then later in the year with Caesars and other customers. And particularly with the launch of Roulette early in the second half of the year. We expect to Roulette to be the stronger the two games. And we have some unique features as we develop this product category, both in North America and around the world with additional operators.
As we discussed in our last call, we've seen some moderating of the trajectory of the Virtual segment off of its all-time highs in the first half of 2023 as Lorne just mentioned, in large part due to some of the things that he had mentioned, including the challenges that we face for some of those things.
But the good news is we have a number of key product launches that -- as well as additional customers and geographies that we expect will take this segment back to growth mode. We've launched the NFL game with several customers and as expected, it's resonating with players and is growing the football product within Virtual Sports. We will be going live with additional customers throughout the year and expect the NFL game to be a strong performer in the North American market.
We'll launch our NBA archive product with OPAP in Greece, our strong partner who have already shown the ability to grow virtuals across their channels. OPAP's retail virtuals business is really a true success story with multiple channels of Virtual Sports across their more than 3,000 retail locations.
OPAP grew their retail virtuals turnover and gross win by 21% in 2023 versus 2022. And frankly, a very mature market. Soccer is, of course, the biggest sport in Greece, but basketball is now up to 10% of their product mix. And with a big marketing push behind the NBA launch in Greece and the fact that one of the best players in the NBA is Greek, we expect this market to flourish throughout 2024.
On the product side, alongside with the rollout of the NFL and NBA games, we expect to launch our hockey game by the end of the year, and it looks amazing in the early days, and we would expect this game to be strong with our North American customers, but particularly in Ontario, which is already becoming a very strong virtuals market. We will update on that product as we get closer to launch date in the fall.
We're also extremely excited by the early developments with operators in Brazil and expect that to be a key market for us going forward. A market of over 200 million people that are so passionate for soccer doesn't come along very often and we spend a lot of time down there recently and have shown our soccer products to multiple stakeholders in the market and all agreed that this should be a very, very strong product in Brazil.
We're bullish on the pipeline of licenses, products and geographies and expect that by this second half of the year, we should be back in growth mode in Virtual Sports. Our land-based business continues to ride the success of the launch of our Vantage cabinet into the market, and both our Gaming and Leisure segments.
We've seen low double-digit growth from two of our largest betting shop operators in the UK, and we are now up to approximately 20% of our estate in the pub segment, having been converted to Vantage. And Vantage is now the highest performing cabinet in the pub sector.
We're also seeing a strong sales pipeline to large operators in the adult gaming centers segment in the UK and expect to be rolling out Vantage across all of these verticals throughout 2024. Our Holiday Parks business is gearing up for their busiest time of the year, with Q2 and Q3 being the strongest quarters for that part of the business.
Lastly, we recently initiated a program to improve our cost base across the business and have a dedicated team working across all aspects of the business to find savings and synergies to drive an increase in our EBITDA margins closer to our internal target of 40% and look forward to reporting on the progress of the initiative as we go throughout the year.
With that, I'll hand it back to Lorne for any closing remarks before opening up to Q&A.

Lorne Weil

Thanks, Brooks. Operator, I think it's fine if you open the program up for Q&A, please.

Question and Answer Session

Operator

(Operator Instructions)
Barry Jonas, Truist Securities.

Hey, there. This is [Rumin Subani] for Barry. Thanks for taking our question. Now that we're rounding the corner on the accounting issues here, do you have any thoughts on M&A here given recent consolidation news in the space?

Lorne Weil

Thoughts regarding our M&A or the -- more on general?

Yeah, more on your -- Yeah, I guess both. First on your front and maybe just in general, what you think about the space?

Lorne Weil

Well, yeah. I mean, we're obviously seeing a consolidation. Some of it seems to make more sense to me than others, but it's kind of hard to know what's in other people's minds sometimes. We're always thinking about M&A. But our primary focus right now is maximizing the revenue and earnings and growth potential of our business. And if things present themselves that makes sense, we'll consider it. But I would say, right this minute, M&A is not at the top of the list of what we're focused on.

Got it. That makes sense. And just a quick follow-up. As far as the NFL product, are you guys seeing any cannibalization on your existing NFL game? And I guess, where would you say are as far as the growth timeline and how material you think that product's going to be on the Virtual segment over time?

Brooks Pierce

Yeah. Well in terms of cannibalization, frankly, it's good news and that, although the NFL game is outperforming the NFLA game, the overall -- so combine as our colleagues would like to call it American football, but we call it football, Segment is continuing to grow.
But again, it's relative in terms of soccer is the predominant Virtual Sports product. But obviously, as we start going into North America, we'll see football being a bigger and bigger contributor because that's obviously the market where it resonates the most.
Maybe just expanding on that a little bit, as I was talking about in my remarks on the NBA, the NBA has an attraction and some of our markets probably more so than the NFL. Obviously, Greece being a perfect example of that.
But we expect -- frankly, our strategy is to get some licensed games, yes, to accelerate our growth in the North American market but frankly, as additional products for our customers on a worldwide basis. And I'm sure you read because I read the same things, the NFL is really focused on trying to become more and more global. We're excited, my Philadelphia Eagles will open their season next year in Brazil, which is great. So we kind of feel great about honestly all the licensed content in Virtual Sports.

Great. Thanks so much for taking our questions. Appreciate it.

Brooks Pierce

No problem.

Operator

David Bain, B. Riley.

David Bain

Great. Thank you and congratulations for putting the filing issue behind you, it seems. One, Lorne, you mentioned Virtual Sports has ticked up in 1Q. Should we view 4Q Virtual Sports as close to kind of a trough absolute level before the back half ramp from new content and maybe --

Lorne Weil

Yeah, I think, basically what we see, if you kind of plot out of the third quarter and the fourth quarter and the first quarter, is that -- and we've talked previously about what was driving that dip down and so forth, is it has -- that process seems to have ended and has ticked up in the first quarter definitely [right now].
Having said that, we're still considerably behind where we were in the first quarter of 2023, which was that the peak. We would like this upturn to have happen sooner, but at least it's happening. And you know, as we move through the year, as Brooks said, I'm pretty comfortable that we're going to see that accelerate. So that's where we are right now, Dave.

Brooks Pierce

Yeah, and because it's -- not only is it kind of exciting new products with the NFL and NBA, but it also takes time to get that distributed to our customers on a worldwide basis. So that's why we talk about how the second half of the year, when we've had some opportunity, to not only get it out to the market, but actually get it more broadly distributed to all of our customers. That really should be the driver.
And by the way, welcome back, Dave.

David Bain

Thanks, Brooks. Appreciate that. Awesome. And you guys mentioned that the Hybrid Dealer exclusive with BetMGM, I know that rolls off in a few months and you go live with the Roulette with BetMGM Caesars in the back half. But seems like the larger operators clearly see the potential cost savings and branding opportunities from the product. Can you maybe elaborate on discussions with mid-tier operators? Do they see this as an opportunity for something to get involved akin to live casino?

Brooks Pierce

Yeah. I mean, it's a great question. I mean, it's really interesting as we look at the pipeline because it's kind of exactly what you would want, is that we have the biggest operators that are very interested in it for the reasons that they have, but frankly, some of the mid-tier and lower-tier operators, in terms of volume, this is an opportunity for them to get in the so called and parentheses live dealer market without have - yeah, I know. That's why I said so-called parentheses. Thanks. It's always great to have Lorne across the table from me on these things.
But anyway. Yeah, so I think that pipeline is pretty robust as well because this is a product that, from a cost standpoint, can be launched fairly easily and from a branding standpoint, can be modified pretty quickly and fairly inexpensively. So it really does kind of opened the funnel to for the Hybrid Dealer product. And that's what we're seeing.

David Bain

Okay, great. Thanks, you both.

Operator

Chad Beynon, Macquarie.

Chad Beynon

Morning. Congrats on the results. Thanks for taking my question. Lorne, you finished your -- I'm sorry, Brooks, you finished your prepared remarks touching on a 40% margin goal. Can you kind of help us think about when this could be achieved? Or more importantly, is this something that just comes with scale as the digital businesses grow and that's such a high-margin business and good flow through? Or will there be extra steps that could improve margins in '24 and early in '25 that are more hands-on versus just getting the benefits of scale? Thanks.

Brooks Pierce

Sure. Well, maybe -- I'll start in the first part and then maybe, I'll let Lorne come out in the second part. So sure, in terms of look as as our business continues to grow on the digital side of the business and with the margins that Lorne mentioned at roughly 75%, that's just going to bring up our overall EBITDA margins.
But I think my remark was really mostly about really getting after some of the cost structure of the business to improve the margins across all segments. But maybe Lorne wants to talk about how -- kind of how we view the segments in that regard.

Lorne Weil

Yeah. Well, if you look at the composition of the overall margin, you've got the average, wherever it is in the 30s. And the digital businesses margin, very much higher than that. The Gaming business and in parts of the Leisure business, right around the average. And then the Holiday Park business has has been consistently operating at margins appreciably. And I guess in a way, unacceptably below the average.
So we're looking at a number of alternatives for how we deal with the profitability Holiday Parks and how we can get that up. So that way, effectively, we're bringing the average up both by pulling it up from the top, where the digital margins are so high and pushing it out from underneath by dealing with the lower margin of the Holiday Park business. And we've got some very good productive ideas that I think we'll be in a position to talk perhaps more about when we report on the first quarter in a few weeks.

Chad Beynon

Perfect. Thank you. And then with respect to leverage, how you're thinking about where you want to be right now, given the, I guess, prolonged period of higher rates, is there a target net leverage goal? And then how does that affect buybacks? Thanks.

Lorne Weil

Well, it's always been our plan to try to consistently be under 3, 2.5, probably a better place. And I think we're -- so I think we're comfortably in the dead zone. We've talked a lot of buybacks, and obviously, we were anxious to continue with buybacks. But having said that, our primary goal is to take full advantage of the opportunities we have in the businesses.
We're not going to do anything to jeopardize that. So I think rank order, and going back to the earlier question about M&A, I think I would put developing the business first. Certainly, making sure that our credit profile is where we wanted to be and then absolutely buybacks and last, M&A.

Chad Beynon

Thank you very much. Appreciate it.

Brooks Pierce

Thanks, Chad.

Operator

Ryan Sigdahl, Craig-Hallum Capital Group.

Ryan Sigdahl

Hey, guys. So wanted to say on Virtual Sports to start. But curious, I think you're with MGM, BetRivers, that 365Live today. But can you give an update on the pipeline of the other operators, namely the other big couple majors in the US? And then secondly on that, you had a deal with Kambi, I guess, is that an integration into all of Kambi's B2B customers or will it be an opt-in option for each of those operators individually?

Brooks Pierce

Yeah. So in terms of -- let me answer the Kambi part first. Yeah, we'll have -- obviously, we'll have the integration with Kambi that will make it available to all of their customers. But it will be kind of a combined effort between our folks and their folks on getting their customers to kind of sign up for Virtual Sports.
So that's kind of in its very early stages. On -- I know exactly what you're asking in terms of the other operators in North America, it's probably best that we just not comment on that. But you can -- as you can imagine, we're obviously having -- we always have active discussions with those. So we'll just kind of park that until something is that we can talk about.

Ryan Sigdahl

Fair enough. Vantage, nice to see the low double-digit revenue uplift per machine. Do you think that's sustainable or I guess, anything from an underlying player metric standpoint that you can elaborate if that's kind of the right trend going forward, similar, worse, better? And then how you think that'll play as you expand into pumps?

Brooks Pierce

Yes, it's interesting that you asked that because I was just showing Lorne some numbers from last week. And two of our biggest betting shop operators. So Vantage has been out for kind of two to three quarters now. So there's been plenty of time to have it bet in and both operators show just last week, was a perfect example of numbers that were, in one case, slightly higher than that and the other case kind of right on the number.
So the fact that the product's been out for six to nine months and it's still doing that kind of business, obviously, bodes well for us. And we obviously have a big customer that we will hope to be rolling Vantage out either later in the year, the beginning of next year.
And then on the Pub segment, it's really driven by how aggressive we want to be in rolling Vantage out to the Pub segment, where it kind of 20% thus far. And you'll see as we go through the rest of the year, we'll continue to convert a number of cabinets to Vantage in the Pub segment, which obviously will be a contributor as we go forward through the rest of the year.

Ryan Sigdahl

Very good. Last question I have. If you're willing to comment on your guiding, but do you expect EBITDA to be up year over year and can your confidence be in that?

Lorne Weil

You had to ask that question. So -- well, we don't -- it's always been our policy not to give guidance, but I feel like I was about to do a JFK, let me say this about that. So I think we're comfortable right now with where the full year consensus is, which is, I think, modestly up from 2023. But from where we're looking at things now, I think it will be somewhat more weighted to the back end of the year and somewhat less in the front end of the year.
The main issues are that while we're obviously quite pleased that the temporary decline in the Virtuals business seems to have run its course, and we're seeing it now beginning to click back up in the first quarter. As I mentioned in my remarks, it's still not in significantly below where it was in the first quarter of 2023. So it's going to take some time for the whole range of initiatives in Virtuals that Brooks talked about to get us accelerating. And a lot of that stuff, we'll see in the second half of the year.
And we have -- we're building really a tremendous backlog in product sales as strong as we've ever seen in just in the last couple of days, we signed a very significant new order from Western Canada lottery, which again, we will probably won't be shipping until the fourth quarter. So -- and in the first quarter, we still got some lingerings unusual stuff relating to the accounting restatement and so forth.
So I think just to reiterate, I think we're fine with the full year consensus, but the combination of a little bit of lag and the picking up strongly of Virtuals, together with the very strong equipment sales backlog that's heavily related to the back end of the year. I think we'll see a shift from the early part of the year to the latter part of the year. I hope that's sufficient.

Ryan Sigdahl

Very helpful. Thanks, Brooks. Thanks, Lorne.

Brooks Pierce

Thanks, Ryan.

Operator

With that, I'll hand the call back to Lorne Weil for any closing remarks.

Lorne Weil

Thank you, operator. And again, thank you, everyone, for joining. Just as a reminder, our 10-K will be filed sometime this morning. And anybody who wants to dig deeper, there'll be plenty of stuff in there. And we look forward to -- I guess, the first quarter would be -- I mean, we -- we're now back on our normal schedule. So our first quarter will be what it normally would be, I guess, in May-ish. And we look forward to talking to you then. So thanks.

Operator

That does conclude today's meeting. Thank you all for joining and you may now disconnect.