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Like casinos, gaming equipment manufacturers riding growth wave

Updated December 9, 2022 - 9:46 am

As the casino industry continues to show resilience in its rebound from the pandemic, so too is the gaming equipment manufacturing sector.

No company may be showing more resiliency than Las Vegas-based Light & Wonder Inc., formerly Scientific Games Corp. In the past 18 months, the company has changed its name, strategic vision, board of directors, chairman and CEO.

“We’ve been on a radical transformation over the last 18 months,” said Light & Wonder Executive Vice President and Chief Financial Officer Connie James in a recent interview. “We set out with a plan to really streamline our organization and fulfill this vision of being the leading cross-platform global games company. Historically, we were a holding organization with five different businesses which didn’t fit together, and now as we sit here today, having divested the sports business on Sept. 30, we have a collection of unique assets.”

In addition to selling its OpenBet sports wagering business to Beverly Hills, California-based Endeavor Group Holdings Inc. in a $800 million cash and stock deal, Light & Wonder earlier this year sold its lottery business to Bermuda-based Brookfield Business Partners L.P. for $5.8 billion in cash.

The sales enable it to pay down debt and focus on what company leaders believe to be its core strength — developing casino games on multiple platforms.

“At the core of our company and the way in which we believe we can create value is really on making the world’s greatest games,” James said. “While sports fits in other companies’ portfolios, what we really owned was a platform and as we think about true value creation and what our competitive advantage is, it’s really having the world’s greatest games designers making the world’s greatest games and being able to deploy those in land-based casinos as well as through digital channels such as iGaming as well as the social sector.”

Careful consideration

Divesting the sports business was a decision reached after three months of study, James said.

“We wanted to create an organization that was purposely designed to fit together which is why we ultimately decided to make the decision to divest sports,” she said. “We knew we needed to solve our debt problems and you couldn’t just do that by trying harder. Rather, you needed to simplify by spinning off those assets.”

Investors and analysts have taken notice.

Last month, Eilers & Krejcik Gaming published a survey that asked its network of casino operators to determine which vendors provided the best slot machine games, slot cabinets and new technology at this year’s Global Gaming Expo in Las Vegas.

The survey revealed Light & Wonder had the second-best showing among manufacturers, achieving its best score in five years, placing behind perennial favorite Aristocrat Technologies Inc., an Australian company with a major Las Vegas presence. Manufacturing giant IGT finished third followed by Everi Holdings Inc. and Konami Gaming Inc.

Todd Eilers, who drafted a report summarizing Light & Wonder’s third-quarter earnings results, expects the company to flourish without its past debt.

“Gaming trends remain strong despite the rising specter of recession; gross gaming revenue is moderating, but remaining well above pre-COVID levels and operator capex budgets have largely recovered and trends this quarter are pointing toward further growth,” Eilers wrote.

“Leased and owned game performance is showing up well, so the company should stand to benefit from that. The company is also investing in the digital growth areas, which should progressively build along with those markets. Additionally, the company has dramatically shifted its risk profile through the sale of the Lottery and Sports Betting business to reduce debt — net leverage is down to 3.1 times at quarter end from over eight times last year. This should allow them to further invest in growth areas as well as weather a potential macroeconomic event.”

‘Cautiously optimistic’

Eilers isn’t the only industry observer who believes the pandemic provided the motivation to sharpen planning skill sets.

“The pandemic helped people be more cautiously optimistic and plan for those things accordingly,” said Daron Dorsey, executive director of the Association of Gaming Equipment Manufacturers. “We had this crazy, unforeseen, once-in-a-generation issue that no one necessarily had a plan or a playbook for. That has tempered people’s expectations and increased their managerial skills so that they can plan for a lot of those things and plan for some unforeseen events and build that into operating their businesses and to be smarter and more efficient.”

Dorsey said the positive energy experienced by casinos is spilling over to manufacturers.

“The operators seem to be doing very well,” he said. “As long as they remain healthy and have an appetite for refreshing new products or updates to existing products, if they continue to see customer counts staying resilient, that benefits the suppliers and manufacturers because they’re there to supply whatever the customers are wanting.”

For many manufacturers like Light & Wonder, that means going big.

The company’s extensive portfolio of slot machine games, which includes Raging Rhino, Rainbow Riches and Wizard of Oz Emerald City, are being formatted into massive cabinets. The company’s Mural cabinet, which incorporates a curved screen, towers more than 11 feet tall.

But the company excels in placing those same casino games online with the same crisp graphics and sounds appearing in portable formats for iGaming and social games.

James, a UNLV graduate whose office is just a few miles away from the campus, said shedding some $5 billion in debt will enable Light & Wonder to invest more in the games themselves.

“When you fast-track into the future, Light & Wonder is going to be the leading cross-platform global games company, meaning we’re going to have the leading market share in every single sector we play in,” she said.

But taking the lead in market share is a tall order with manufacturing heavyweight IGT in the picture.

IGT also strong

London-based IGT, which continues to have a major presence in Nevada, also had positive results in its third-quarter earnings. IGT continues to ride global lottery sales and sports wagering as well as game manufacturing.

Its highly visible Wheel of Fortune franchise stands out on casino floors.

“Global gaming had another terrific quarter with revenue up over 30 percent and operating profit more than doubling, thanks to broad-based momentum across all main key performance indicators,” Vince Sadusky, CEO of IGT, said in an earnings call this month.

“The increase in profit is noteworthy since global gaming has had to sustain higher supply chain costs than our other businesses,” he said. “Our roster of core video and multilevel progressive games on award-winning new hardware drove record unit shipments in the U.S. and Canada for our third quarter and year-to-date period. This resulted in the highest U.S. and Canada average selling prices ever in the third quarter.”

He said the company’s Prosperity Link, Money Mania and Wheel of Fortune High Roller titles are fueling installed base growth and driving higher yields.

Other manufacturers have shown similar boosts since the pandemic ended.

Aristocrat, a subsidiary of Aristocrat Leisure Ltd., which is only required by Australian regulators to post earnings twice a year, reported a 41 percent increase in profits for the half year that ended March 31.

Las Vegas-based Everi Holdings’ third-quarter revenue was up 21.4 percent to $204.3 million, beating analysts’ expectations by 4 percent, and net income was up 336 percent year over year to $29.4 million. Everi, which owns the Super Fiesta! and Cha-Ching! slot machine franchises, said it expects its fourth-quarter daily win per unit to exceed the daily win per unit reported in the fourth quarters of 2019 and 2020.

Yet how long can the industry’s winning streak be sustained?

AGEM’s Dorsey knows it can’t last forever.

“You plan for the worst and hope for the best,” he said. “Everyone’s still trying to be cognizant that market circumstances do change and customer appetites do change and there could be economic impacts out there. There are dips and rises, so everyone’s always generally prepared because those possibilities may be there and they plan accordingly.”

This story has been updated to correctly reflect Connie James’ title and the OpenBet sale price.

Contact Richard N. Velotta at rvelotta@reviewjournal.com or 702-477-3893. Follow @RickVelotta on Twitter.

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