Light & Wonder, Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion is intended to enhance the reader’s understanding of our operations and current business environment from management’s perspective and should be read in conjunction with the description of our business included under *Part I, Item 1 “*Condensed Consolidated Financial Statements” and *Part II, Item 1A “*Risk Factors” in this Quarterly Report on Form 10-Q and under *Part I, Item 1 “Business,” Item 1A “*Risk Factors” and *Part II, Item 7 “*Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 10-K.

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under “Forward-Looking Statements” and “Risk Factors” included in this Quarterly Report on Form 10-Q and “Risk Factors” included in our 2023 10-K. As used in this MD&A, the terms “we,” “us,” “our” and the “Company” mean L&W together with its consolidated subsidiaries.

BUSINESS OVERVIEW

We are a leading cross-platform global games company with a focus on content and digital markets. Our portfolio of revenue-generating activities primarily includes supplying game content and gaming machines, CMSs and table game products and services to licensed gaming entities; providing social casino and other mobile games, including casual gaming, to retail customers; and providing a comprehensive suite of digital gaming content, distribution platforms and player account management systems, as well as various other iGaming content and services.

As more fully described in *Part I, Item 1 “*Business” in our 2023 10-K, we are executing on our strategy to become a leading cross-platform global games company with a focus on content and digital markets. We report our results of operations in three business segments—Gaming, SciPlay and iGaming—representing our different products and services. See “Business Segments Results” below and Note 3 for additional business segment information.

CONSOLIDATED RESULTS

($ in millions)

28

Revenue

Consolidated Revenue by Business Segment

(in millions)

Three Months Ended March 31, 2024 and 2023

Gaming revenue growth for the three months ended March 31, 2024 was $57 million or 14%, primarily driven by global Gaming machine sales growth of 30% coupled with continued strength in Systems and Gaming operations as well as success of our content performance.

For the three months ended March 31, 2024, SciPlay revenue increased by $20 million or 11%, compared to the prior year period, primarily due to increased average revenue per daily active user and social casino player engagement. Average revenue per daily active user grew 13% in 2024, reaching a new record high of $1.01.

iGaming revenue increased by $9 million or 14% for the three months ended March 31, 2024, compared to the prior year period, primarily due to continued momentum in the international and U.S. markets as well as the strength of our original content.

Operating Expenses

($ in millions)

Cost of Revenue

Total cost of revenue for the three months ended March 31, 2024 increased as a direct result of higher revenue as described above, driven by $13 million in higher cost of products revenue primarily associated with higher gaming machine sales, while increased cost of services was primarily driven by SciPlay, which increased $3 million compared to the prior year period due to revenue growth.

SG&A

SG&A increased for the three months ended March 31, 2024 as compared to the prior year period, primarily due to higher salaries and benefits of $10 million and higher marketing spend of $9 million (primarily driven by the SciPlay segment).

R&D

R&D increased for the three months ended March 31, 2024 as compared to the prior year period, largely due to higher salaries and benefits, primarily in the Gaming and SciPlay segments.

D&A

D&A decreased primarily due to fully depreciated assets and amortization of intangible assets related to certain of our legacy trade names as well as past acquisitions associated with our Gaming segment.

Restructuring and Other

The decrease in restructuring and other for the three months ended March 31, 2024, as compared to the prior year period, was primarily due to lower professional service, legal and other costs related to the strategic review and related transactions. Refer to Note 4 for more information.

Other Factors Affecting Net Income Attributable to L&W

(in millions)

Foreign Currency Exchange (F/X)

Our results are impacted by changes in foreign currency exchange rates used in the translation of foreign functional currencies into USD and the re-measurement of foreign currency transactions or balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. Our exposure to foreign currency volatility on revenue is as follows:

($ in millions)

BUSINESS SEGMENT RESULTS (for the three months ended March 31, 2024 compared to the three months ended March 31, 2023)

GAMING

Our Gaming business segment designs, develops, manufactures, markets and distributes a comprehensive portfolio of gaming content, products and services. We provide our Gaming portfolio of products and services to commercial casinos, Native American casinos, wide-area gaming operators such as LBOs, arcade and bingo operators in the U.K. and continental Europe, and government agencies and their affiliated operators.

We generate Gaming revenue from both services and product sales. Our services revenue includes revenue earned from Participation gaming machines, other leased gaming machines (including VLTs and electronic table games), supplied table products and services (including Shufflers), casino management technology solutions and systems, and other services revenues. Our product sales revenue includes the sale of new and used gaming machines, electronic table games, VLTs and VGTs, casino-management technology solutions and systems, table products, proprietary table game licensing, conversion kits (including game, hardware or operating system conversions) and spare parts.

For additional information, refer to the Gaming primary business activities summary included within “Business Segment Results” under Item 7 of our 2023 10-K.

Current Year Update

The increase in Gaming revenue for the three months ended March 31, 2024, as compared to the prior year period, was primarily driven by continued global Gaming machine sales growth of 30% coupled with growth in Systems and Gaming operations, which benefited from increased U.S. and Canada installed base and higher average daily revenue per unit. Our growth is driven by the continued strength and success of our content portfolio performance, driving Game sales growth in North American-adjacent and International markets, led by Australia and Asia, as well as persistent success of our COSMICTM and MURAL® cabinets. Our robust portfolio of hit franchises is expected to drive further growth in the remainder of 2024. While demand remains strong, we are actively monitoring any impact of inflationary pressures and macroeconomic uncertainty that may impact our operations. We are also monitoring for any potential disruptions in our supply chain, such as those due to armed conflicts or hostilities, and we increase our inventory positions when deemed necessary to mitigate any expected or unexpected delays and fulfill customer orders timely.

Results of Operations and KPIs

Three Months Ended March 31, 2024 and 2023

31

($ in millions, except per unit amounts)

Gaming Operations

Gaming operations revenue growth was driven by strong game performance of hit franchises, including our premium games. Gaming operations for U.S. and Canada had a 859-unit increase in installed base, along with an increase in average daily revenue per unit of $2.10 for the three months ended March 31, 2024. Average daily revenue per unit for International units increased slightly for the three months ended March 31, 2024, but International ending installed base units decreased by 4,057 units primarily due to the expected closure of certain LBOs in the U.K. along with the reduction of certain low-yielding units in Greece and Latin America.

Gaming Machine Sales

Gaming machine sales revenue increased primarily due to higher sales of replacement units globally as operator capital spending remained at healthy levels, casino opening and expansion activity increased internationally and average sales price per new unit increased, mostly from a favorable product mix.

The following table summarizes Gaming machine sales changes:

Operating Expenses and AEBITDA

The increase in operating expenses is primarily due to $11 million in higher SG&A costs coupled with $11 million in higher cost of revenue associated with the increase in revenue as described above, partially offset by $18 million in lower D&A as a result of fully depreciated and amortized assets related to prior acquisitions and legacy trade names during 2023.

AEBITDA increased by $26 million or 13%, and AEBITDA as a percentage of revenue (“AEBITDA margin”) remained at 49%. These results were primarily driven by revenue growth in the period.

SCIPLAY

Our SciPlay business segment is a leading developer and publisher of digital games on mobile and web platforms. SciPlay operates primarily in the social gaming market, which is characterized by gameplay online or on mobile devices that is social, competitive and self-directed in pace and session length. SciPlay also operates in the hyper-casual space, which is characterized by simpler core loops and more repetitive gameplay than casual games. SciPlay generates a substantial portion of its revenue from in-app purchases in the form of coins, chips and cards, which players can use to play slot games, table games or bingo games. Players who install SciPlay’s social games typically receive free coins, chips or cards upon the initial launch of the game and additional free coins, chips or cards at specific time intervals. Players may exhaust the coins, chips or cards that they receive for free and may choose to purchase additional coins, chips or cards in order to extend their time of game play. Once obtained, coins, chips and cards (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play within SciPlay’s apps. SciPlay generates additional revenue through advertising arrangements in SciPlay’s hyper-casual games, which was not material for the periods presented. Players who install SciPlay’s hyper-casual games receive free, unlimited gameplay that requires viewing of periodic in-game advertisements.

SciPlay currently offers a variety of social casino games, including JACKPOT PARTY® Casino, QUICK HIT® Slots, GOLD FISH® Casino, 88 FORTUNES® Slots, MONOPOLY Slots and HOT SHOT CASINO®. SciPlay continues to pursue its strategy of expanding into the online and mobile games market. Current casual game titles include BINGO SHOWDOWNTM and BACKGAMMON LIVE as well as other titles in the hyper-casual space, including games such as CANDY CHALLENGE 3D, BOSS LIFE and DEEP CLEAN INC. 3D. SciPlay continually develops and tests various new games. SciPlay’s social casino games typically include slots-style game play and occasionally include table games-style game play, while its casual games blend solitaire-style or bingo game play with adventure game features and its hyper-casual games include many simple core loop mechanics. All of SciPlay’s games are offered and played across multiple platforms, including APPLE, GOOGLE, FACEBOOK, AMAZON and MICROSOFT. SciPlay launched a proprietary in-app purchase platform during 2023, with the goals of improving players’ experience and reducing costs of revenue given the lower payment processing fees and other related expenses for in-app purchases made through the proprietary platform, as compared to the platform fee charged by third-party platforms. The revenue generated via the proprietary platform has begun to increase and represented approximately 6% of the total SciPlay revenue for the first quarter of 2024. In addition to original game content, SciPlay’s content library includes recognizable game content across our other platforms within Gaming and iGaming. This content allows players who like playing land-based game content to enjoy some of those same titles in SciPlay’s free-to-play games.

Current Year Update

SciPlay started 2024 by delivering strong results, and it continues to see elevated payer engagement. Revenue growth was 11%, which was primarily attributable to the revenue generated by Jackpot Party Casino, Quick Hit Slots and Gold Fish Casino. We believe that there is an opportunity for continued improvement of operating results in 2024 and beyond, as SciPlay continues to deploy strategic game updates, utilize enhanced analytics, pursue international expansion and benefit from the proprietary in-app purchase platform launched in 2023.

We have a significant portion of SciPlay personnel located in Tel Aviv, Israel. In light of current circumstances in Israel, we are actively monitoring developments and are ready to redirect resources as needed to minimize impact on SciPlay operations. We do not have servers or infrastructure that are located in Israel that host our games. While we have not yet seen an impact on our business from current events, they could negatively affect the performance of the personnel in that area and have an adverse impact on our business if these events continue and/or escalate.

Results of Operations and KPIs

Three Months Ended March 31, 2024 and 2023

(1) Other represents $12 million in revenue generated via our proprietary platform during the three months ended March 31, 2024, along with advertising and other revenue, which were not material for the periods presented.

(in millions unless otherwise noted)

Revenue increased as average monthly revenue per paying user increased 17% while social casino payer engagement remained relatively constant.

Mobile penetration percentage decreased to 84%, primarily reflecting an increase in revenue generated via our proprietary platform with a majority of players continuing to use mobile platforms to play SciPlay’s games.

Average MAU and average MPU decreased due to the turnover in users. ARPDAU increased as a function of higher player monetization with a slight decrease in average DAU. AMRPPU increased, with payer conversion remaining relatively constant, as SciPlay continues to improve content and features resulting in increased paying player interaction.

Payer conversion rates continue to be at high levels due to consistent payer interaction with the games as a result of SciPlay’s focus on introducing new content, features and live events in their games.

Operating Expenses and AEBITDA

The increase in operating expenses correlated with the above-described increase in revenue as a result of higher platform fees, resulting in $3 million in higher cost of revenue, coupled with higher marketing spend of $7 million, and higher salaries and benefit costs (including stock-based compensation) of $4 million related to an increase in headcount.

AEBITDA increased by $8 million and AEBITDA margin increased by 1 percentage point to 30%, primarily due to revenue growth as discussed above, partially offset by the increase in operating costs resulting from increases in marketing spend and salaries and benefits.

iGAMING

Our iGaming business segment provides a comprehensive suite of digital gaming content, distribution platforms and player account management systems, as well as various other iGaming content and services. The majority of our revenue is derived from casino-style game content, including a wide variety of internally developed and branded games as well as popular third-party provider games. These games are made available to iGaming operators via content aggregation platforms, including Open Gaming System, remote gaming servers and various other platforms. We also provide our Open Platform System, a player account management system which offers a wide range of reporting and administrative functions and tools providing operators full control over all areas of digital gaming operations. Generally, we host the play of our game content which is integrated with the online casino operators’ websites.

Current Year Update

We continue to expand our customer base and capitalize on growth in the European and North American markets by leveraging our industry leading platforms, content and solutions, as well as investing in our ability to scale our own original U.S. land-based content offering. Currently we have launched in six U.S. states and launched our live casino operations in Michigan, and we are positioned to enter others as additional state legislatures authorize online gaming.

Results of Operations

Three Months Ended March 31, 2024 and 2023

Overall, iGaming revenue increased by $9 million or 14% compared to the prior year period, primarily driven by continuing momentum in the international and U.S. markets as well as the strength of our original content and growth in our partner network. Wagers processed through our Open Gaming System for the current year period increased to $22 billion.

Operating expenses increased slightly in correlation with the increase in revenue. AEBITDA increased by $2 million or 9%, and AEBITDA margin decreased slightly to 34% compared to the prior year period due to continuing investments in growth initiatives.

RECENTLY ISSUED ACCOUNTING GUIDANCE

We do not expect that any recently issued accounting guidance will have a significant effect on our consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

For a description of our policies regarding our critical accounting estimates, see “Critical Accounting Estimates” in I*tem 7 “*Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 10-K.

There have been no significant changes in our critical accounting estimate policies or the application of those policies to our condensed consolidated financial statements from those presented in *Item 7 “*Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 10-K.

LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL

Cash and Available Liquidity

As of March 31, 2024, our principal sources of liquidity, other than cash flows provided by operating activities, were cash and cash equivalents as well as amounts available under the LNWI Revolver.

Cash and Available Revolver Capacity

(in millions)

Total cash held by our foreign subsidiaries was $150 million and $166 million as of March 31, 2024 and December 31, 2023, respectively. We believe that substantially all cash held outside the U.S. is free from legal encumbrances or similar restrictions that would prevent it from being available to meet our global liquidity needs.

Our Gaming operations generally require significant upfront capital expenditures, and we may need to incur additional capital expenditures in order to retain or increase market share and continue our product investments. Other capital requirements for the near term primarily include debt principal and interest payments and also include purchase obligations and supply contracts, license agreement minimum guaranteed payments and lease obligations. There have been no material changes to our capital requirements disclosed in our 2023 10-K, other than those associated with our repricing of the LNWI Term Loan B, as described in Note 10.

Our ability to make payments on and to refinance our indebtedness and other obligations depends on our ability to generate cash in the future. We may, from time to time, repurchase or otherwise repay, retire or refinance our debt, through our subsidiaries or otherwise. In the event we pursue significant acquisitions or other expansion opportunities, or conduct significant repurchases of our outstanding securities, we may need to raise additional capital. If we do not have adequate liquidity to support these activities, we may be unable to obtain financing for these cash needs on favorable terms or at all. For additional information regarding our cash needs and related risks, see “Risk Factors” under Part I, Item 1A in our 2023 10-K.

On March 1, 2022, our Board of Directors approved a share repurchase program under which we are authorized to repurchase, from time to time through February 25, 2025, up to an aggregate amount of $750 million of our outstanding common stock. During the three months ended March 31, 2024, we repurchased approximately 0.2 million shares of common stock under the program at an aggregate cost of $25 million.

Cash Flow Summary

(in millions)

Cash flows from operating activities

(in millions)

37

Net cash provided by operating activities decreased primarily due to unfavorable changes in working capital accounts, partially offset by a $12 million increase in earnings (drivers described above).

Changes in working capital accounts for the three months ended March 31, 2024 were primarily impacted by higher billings, timing of disbursements and restricted customer deposits.

Cash flows from investing activities

Net cash used in investing activities increased primarily due to higher capital expenditures in order to support Gaming operations growth. Capital expenditures are composed of investments in systems, equipment and other assets related to contracts, property and equipment, intangible assets and software.

Cash flows from financing activities

Net cash used in financing activities was flat, as an increase in net redemptions of common stock under stock-based compensation plans was offset by lower license payments and purchases of our outstanding common stock under our share repurchase program.

Credit Agreement and Other Debt

For additional information regarding the LNWI Credit Agreement and other debt, interest rate risk and interest rate hedging instruments, see Notes 15 and 16 and *Item 7A “*Quantitative and Qualitative Disclosures About Market Risk” in our 2023 10-K as well as Notes 10 and 11 and Item 3 below in this Form 10-Q.

Off-Balance Sheet Arrangements

As of March 31, 2024, we did not have any significant off-balance sheet arrangements.

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and commodity prices. The following describes our financial instruments which expose us to market risk.

Interest Rate Risk

As of March 31, 2024, the face value of long-term debt was $3.9 billion, including $2.2 billion of variable rate obligations that fluctuate based on SOFR. Assuming a constant outstanding balance for our variable-rate long-term debt and excluding the impact of interest rate swap contracts, a hypothetical 1% change in interest rates would result in interest expense changing by approximately $22 million. All of our interest rate sensitive financial instruments are held for purposes other than trading.

In April 2022, we entered into interest rate swap contracts to hedge a portion of our interest expense associated with our variable rate debt and effectively fix the interest rate that we pay. The objective of our interest rate swap contracts, which are designated as cash flow hedges of the future interest payments, is to eliminate the variability of cash flows attributable to the SOFR component of interest expense to be paid on a portion of our variable rate debt. These hedges mature in April 2027.

For additional information regarding our long-term debt and interest rate swap contracts, see Notes 10 and 11, respectively.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 3a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of March 31, 2024.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our risk factors from those disclosed under *Item 1A “*Risk Factors” included in our 2023 10-K.