Good afternoon and welcome to the Light & Wonder Market Update Conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If you would like to ask a question, please press star one on your telephone keypad. We are also limiting questions to one question each. I will now pass the conference over to Steve Wan, CEO and Director of Investor Relations. You may now go ahead.
Thank you, Operator, and welcome everyone to our market update call. With me today are Matt Wilson, our President and CEO, and Oliver Chow, our CFO. During today's call, we'll provide an update on the Dragon Train litigation, followed by a question-and-answer session. Today's call will contain forward-looking statements that may involve certain risks and uncertainties and that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to the press release relating to this call posted on our website. We'll also discuss certain non-GAAP financial measures. Additional information on these non-GAAP financial measures can be found in the press release relating to this call on our website. Now I'll turn it over to Matt.
Thanks, Steve, and hello everyone. Thanks for joining us. The purpose of today's call is to provide an update and clarity surrounding the ongoing litigation with Aristocrat. On March 14, Aristocrat filed an amended complaint with the District Court of Nevada against the game Jewel of the Dragon and various other claims addressed in the press release. The initial claims from 2024 concerning Jewel of the Dragon did not include a claim for trade secret misappropriation. Aristocrat has now added this claim with respect to the game. Subsequently, we filed a request with the court to respond to the amended complaint, which the court granted. As of today, we are substantively responding to the latest amended complaint and expect this to be completed by April 11.
Importantly, we made the decision to voluntarily stop commercializing and offer to replace Jewel of the Dragon to minimize any confusion and potential disruption to our customers. We are seeking to ensure that our customers are not affected by the back-and-forth nature of the legal process. The success we had in rapidly replacing the Dragon Train unit, which was a prior subject of trade secret misappropriation claims by Aristocrat, and the limited Jewel of the Dragon footprint, along with the strong game performance of our broader portfolio, give us confidence that this is the best course of action for our customers at this point as we continue to build great games. For context, Jewel of the Dragon's premium installed base footprint is less than 1% of the total premium installed base units in North America, with approximately 150 premium lease units.
In regard to the independent review that many of you have inquired about, I'm happy to provide further details and transparency on this process. Since the injunction ruling on Dragon Train, we've undertaken a broad third-party audit by an independent expert with deep experience in the industry, referencing our release statement. That review has not identified any evidence of contagion for all Hold & Spin games released from mid-2021. After Aristocrat added the trade secret claim on Jewel of the Dragon, we identified certain Aristocrat par sheets from 2015 that appear to have been available to certain members of the Jewel of the Dragon development team. Par sheets are used by suppliers to describe the performance characteristics and settings of a slot machine and contain information about the game's payout structure, odds, and other mechanics of how the machine operates.
These par sheets have been historically provided to customers to allow them to meet regulatory requirements and to understand their own exposure as it relates to the likelihood of large to infrequent award amounts. Because par sheets have been so widely distributed, it has historically been common for par sheets from industry players, including LNW, to end up in the hands of competitors. In light of the par sheets reference, we are extending the scope of that audit to include all Hold & Spin games released before mid-2021. That will involve reviewing a similar number of games to those already reviewed. We are working to complete this process as quickly as possible and have no reason to believe that the expanded review covering all Hold & Spin games released before mid-2021 will identify evidence of similar issues.
We expect completion of this review within four weeks and to provide an update on the review in conjunction with our upcoming earnings call. We remain steadfast in our commitment to continued R&D investment to further develop our catalog of proven evergreen franchises. We are a purpose-built organization for creating a diverse portfolio of great games that players want to play, and our strategy is working. The broad uplift in share gains and game performance we have experienced across our portfolio is a testament to the quality of the talent and the culture in our organization. We are extremely proud to have a robust and diversified portfolio of the best products in the market. You give us a competitive advantage not tied to any one game or franchise.
Most importantly, our decision to stop commercializing and offer to remove Jewel of the Dragon is not expected to have a material effect on our revenue, nor our commitment to delivering our $1.4 billion targeted consolidated AEBITDA and targeted adjusted NPATA range between $565 million and $635 million for 2025, and is not expected to impact our future growth. For clarification, this guidance is affirmed without the benefit of the acquisition of Grover Gaming's charitable gaming business, which we expect to close during Q2 this year.
Lastly, I want to thank our customers and stakeholders for their unwavering support as we continue to execute the strategy. We look forward to sharing our new strategic objectives at our upcoming Investor Day. As a reminder, we've also provided a comprehensive press release, which includes further detail on the matter, which is available on our website. We will now open the line for Q&A. Operator.
Thank you so much. We will now be moving to our Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. To remove your question, press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We are also limiting questions to one question each. Our first question comes from Barry Jonas of Truist. Your line is now open.
Hey, guys. Good afternoon and thanks for doing this. Matt, what are the next steps for the legal process here? As it relates to Jewel of the Dragon, would you look to re-commercialize the game if the ruling comes out in your favor? Thanks.
Yeah, thanks, Barry. We wanted to get on the front foot here and voluntarily stop commercializing Jewel of the Dragon. It's a small game relative to the universe of games that we created. If you think about it through the lens of the premium install base, it's 150 games. Compare that to Dragon Train, which was 2,200 games. If you remember how we dealt with that back in September and October of last year, we very quickly converted 2,200 units to other games. We're able to kind of maintain the fleet and actually grow the install base quite dramatically in the Q4 , I think was a highlight of that earnings call. For us, taking Jewel of the Dragon out of play from a lease perspective is simple. We've got a broad portfolio of games we can quickly convert to, and it just limits the noise.
We feel like this game has some similarities to Dragon Link, but it's not the same. Even if you look at the injunction, Aristocrat's experts reviewed the game and told us we failed to replicate the mathematical profile of Dragon Link. That was their experts in reviewing Jewel of the Dragon. This will be a matter for the courts to decide down the line. What was pertinent to us was to not drag our customers through this again. They're so supportive of us. They're the ones that have put us in the number one ship share position in Australia. Again, in the Q1 , which just closed a couple of days ago, you can get that information through Max Gaming, but also here in the U.S.
Dealing with them effectively, managing through this so they do not have to get dragged into the drama between Aristocrat and us was important. We felt like it was the right thing to do to voluntarily stop commercializing this, limit the noise. If we get a favorable ruling, we will kind of reactivate the game. In reality, it is a small game in the universe of titles that we have launched, and we have a broad portfolio that we are bringing to bear on the market. That is our position related to that.
Yeah. Just to build on that, I think from a materiality perspective, we mentioned this earlier, it's immaterial from a revenue perspective. We're looking at probably low to mid single-digit millions of impact from a revenue point of view. Really, this game, to Matt's point, is really kind of the end of its kind of sale cycle. Yeah, we're just focused on creating incremental games. We're at IGA right now, and the teams are displaying some of our new games and content there. That's where our focus is at the moment.
Great. Thanks so much.
Thank you. Our next question comes from Matt Ryan of Barrenjoey. Your line is now open.
Oh, thank you. Hi, Matt. Hi, Oliver. I just had a question on the reviews that have gone on so far, which obviously includes the independent review and whether they've found that any IP outside of the par sheets was shared with other members of the team. I just on the par sheets, has there ever been a litigation brought forward in the industry because of the sharing of these par sheets?
Hey, Matt. Yeah, multi-part question there. As it pertains to the contagion exercise, the board activated a third-party independent audit of all Hold & Spin games that were brought to market post Dragon Train. Obviously, the information that we had acquired to build that game, we wanted to make sure that did not show up in any other Hold & Spin games that we launched. We subsequently reviewed every Hold & Spin game that was launched post 2021 and found no evidence of contagion. We had an independent third-party auditor certify that. We felt really good about that. What we are talking about here is a similar yet unrelated issue. Par sheets are a very different kettle of fish. These things are pervasive in the industry. They are handed to customers when games are purchased. They have a limited kind of subset of mathematical data, things like hold percentages, jackpot frequencies, these types of things.
The issue at hand now is to make sure that we can go back and look at all Hold & Spin games dating back to 2015 when the first game was created in that category by Aristocrat and run the same contagion exercise to make sure that none of those math values are showing up in the games back to 2015. We're doing that work expeditiously. Obviously, there's an 80/20 rule here. A handful of games drove the highest amount of revenue for us. We're quickly certifying that those games have none of these math values in them. Given the fact that we found nothing from 2021 to current day, nothing suggests we're going to find those values retroactively, but we're going to do the work. We're going to do it quickly.
We'll share that information with major shareholders as we start to certify that, and then we'll give a full update at the Q1 earnings call in May. We'll give periodic updates to investors between now and then. There has been litigation in the space. A cursory Google search will bring that up. None against Light & Wonder or any of our previous companies, but other major suppliers in the space have had issues related to par sheets. If you can do a cursory Google search to uncover that.
Thank you.
Thank you. Our next question comes from David Katz of Jefferies. Your line is now open.
Hi. Afternoon, everyone. Thanks for all the information. Just curious, what did you replace the 150 games with? Was there any one specific title? If we could talk a little geography about sort of where the 150 were, if there was any concentration, that would help. Thank you.
Thanks, David. Yeah, this is kind of a little bit fresh. It was late last week we advised customers that this was our intention. We are kind of in the process now of activating that. There's a range of games, so it's not really a one-for-one swap. There's kind of a bit of a smorgasbord of games that we're making available to customers to convert to. Nothing in terms of market concentration. It's a game that's, again, it's de minimis in terms of the install base. Well over 30,000 games in the install base. This is 150 copies of this game. Pretty well dispersed geographically. No real concentration to speak to.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from David Fabris of Macquarie. Your line is now open.
Oh, hi, Matt. Hi, Oliver. I'm curious to understand what processes you've changed or planning to change as part of game development and commercialization of product to mitigate future litigation. I guess what I'm trying to understand here is what thought was put in by Light & Wonder Management around the launching of Dragon Train and Jewel of the Dragon, considering the similarities, if there was thought put into that? Any thoughts around how you can mitigate future litigation would be really helpful.
Yeah, great question. Governance is obviously a high-priority item for the board and myself. What I'll say is the team deeply understands where the bright line is. We've said publicly we want to compete fiercely but fairly, and we're all signed up to that. What we're dealing with here is a legacy issue that predates Dragon Train effectively. It's similar yet unrelated. The mandate is clear. The design teams understand. We've enhanced protocols looking at personal devices as new game designers join the organization. Dragon Train, and then to a lesser extent, Jewel of the Dragon is a very public reminder that there are consequences and that we have to be vigilant when it comes to maintaining the high standard of governance. I would say post Dragon Train, the teams deeply understand the requirements about how we compete.
Again, this is a legacy issue that we're having to deal with directly. Again, I don't think it's at the same level as Dragon Train. These par sheets, like I said earlier, are pervasive. They're all over the industry. It is similar yet unrelated, but the bar has been set. Protocols are in place. This is a legacy issue that we're having to manage through.
Yeah, perfect. Understood. Thank you, Matt.
You're welcome.
Thank you. Our next question comes from Rohan Gallagher of Jarden. Your line is now open.
Matt, Oliver, good afternoon. Hello everyone. A few of the questions have already been answered. I am recognizing this is not a quarterly call and you're now in blackout, but perhaps, Oliver, can you assist us with any anticipated financial impacts across this broader litigation update, whether it be the few millions of dollars of revenue associated with Jewel of the Dragon, extra legal costs, provisioning, etc., would be helpful. Thank you.
Yeah. Thanks, Rohan. Yeah. As you just mentioned, we are firmly in blackout at the moment, so can't be discussing anything from a Q1 perspective. I did mention earlier in the call that I would say at worst-case scenario, this is a low to mid single-digit million revenue impact for us, and that's worst-case scenario. For us, this is an immaterial impact to the broader business. We are just going to continue to kind of work through our execution to the $1.4 billion target that remains on track, and we have line of sight to that, and that's where our focus is. In terms of kind of corporate or kind of legal expenses, what I would say is we'll continue to kind of manage through the previous guide that we provided around that $40 million range.
Obviously, there's going to be some puts and takes there, but we'll manage that through and provide updates as needed in a couple of weeks.
Thank you, Oliver.
Let me just jump in there very quickly and go back to a question that Matt Ryan asked. I'm not sure I completely covered his question. There was a question there about information being shared from Emma to other studios. We addressed this in the release. Obviously, we've heard that in terms of rumors in the market about that. We've identified those emails. We've gone back and reviewed the games with those studios that were part of that email thread and found no evidence of contagion. Aristocrat really brought the initial claim around trade secrets against Dragon Train just last week. They brought the additional claim against Jewel of the Dragon. They're both Hold & Spin games. They've brought no claims against any other game in our portfolio. In fact, no competitor's brought any other claim against any other game in our portfolio.
This is isolated to this single category, and we're comfortable that although emails were sent around the business from Emma, she was an employee here, that makes sense that she would do that. We've done the work to make sure there's no contagion in the games that are created by those studios. Next question.
Our next question comes from Justin Barratt of CLSA. Your line is now open.
Hi guys. Thanks very much for your time this morning. Matt, I appreciate your commentary that to this point there's no evidence of contagion, but I was curious to sort of see what you're going to need to do going forward for, I guess, those other parties that were privy to those emails from Emma. Are you going to need to sort of continue to check any games that they make in the future for that risk? Are you going to have to get independent reviews done of those games to confirm that, I guess, none of the math models have been used in the development of any future games? I guess more broadly, is that a costly exercise?
Yeah, it's a good question. I would say, again, the dispute's isolated to Hold & Spin games. Think about the breadth of our portfolio: Huff and Puff, Dancing Drums, Monopoly, Wizard of Oz, Blazing Sevens. None of these games are Hold & Spin games. It's a fraction of our portfolio. We'll continue to make Hold & Spin games because players want to play them, customers want to buy them. To the extent that we make them, we'll check and verify that none of the math values that we had in our possession end up in a finished product. It's part of our go-forward process. I just want to underscore the point that this is a fraction of our portfolio. The vast majority of success that we've had over the last five years has been built off unique IP that's specific to Light & Wonder, these big tentpole franchises.
Huff and Puff is the best example of that. It's without peer in the marketplace in terms of the way the game plays. We're going to continue to lean into that where we build Hold & Spin games. We'll do the governance work to certify that there's no contagion the same way we've done with the games post 2021 and the work we're doing back to 2015. We've got a very thorough process that we can activate there to make sure that we don't expose ourselves to any further issues.
Great. Thanks very much.
Thank you. Our next question comes from Ryan Sigdahl of Craig- Hallum. Your line is now open.
Hey, good afternoon. Hey, good afternoon, guys. Curious if the updates here to the litigation process, has that caused any restriction on the buyback program?
Yeah. Thanks for the question. Yeah. I think, broadly speaking, we've successfully implemented and executed our capital allocation strategy over the last couple of years. I think for us, we will always continue to look at opportunities where we see price dislocations in the market. Certainly, at these levels, these are very attractive levels. Yeah, this will be evaluated against our other options. Yeah, I would expect that we will be taking advantage of any dislocations. Right now, it seems like a moment in time that has significant value, Ryan. Yeah, we will be prudent in that.
Yeah. To double down on that, post the Dragon Train situation, September, October, we saw opportunistically a great time to step in and purchase the company stock at depressed values. That's the way the board operates from a capital management perspective, and we see no reason to change that.
Thanks, Matt. Oliver.
Thank you.
Thank you. Our next question comes from Rohan Sundram of MST Marquee. Your line is now open.
Thank you. Hi, Matt and Oliver. Just the one from me. Questions have been largely answered. Maybe if we can just touch on what has been the customer response? What are customers saying to you at this point in time amidst all of this? Thanks.
Yeah, great question. It is largely a non-event for customers. I know a lot of sell-siders have done your own work with the customer base. Customers are looking for games that are going to support their mission of growing their EBITDA, hitting their budgets. To the extent that we build great games, they are willing to support us. They are frustrated that this battle between the two companies is playing out so publicly and impacting them. They breathe a sigh of relief with the ruling in the Australian market that the Dragon Train games could stay in the fleet. They want less noise between the two companies. They want us to compete fairly on the pitch, which we intend to do. They are very supportive.
That's, again, evidenced by the fact that with no Dragon Train and a handful of Jewel of the Dragon games in Australia, Brabbers secured the number one position again in Q1, which is huge. I mean, that's a market that's been dominated by one supplier for the last 50 years. We're still number one there. That just shows you the level of their support. Again, the idea of us voluntarily decommissioning Jewel of the Dragon was another sign that, hey, we're here to stand behind our customers, to limit the noise, to keep moving forward. Where we want to take the business, we're not going to get there in spite of our customers. They have to enable our success. We think about them through every lens when we make these decisions. They've been supportive. We believe we're going to see them be supportive into the future.
Thanks, Matt.
Thank you. Our next question comes from Joe Stauff of SIG. Your line is now open.
Thank you. Matt, I was just curious about how this affects essentially your new game pipeline and how you're leading that into 2025 and 2026. Does it disrupt it? I know in the amended claim, it mentioned a game yet to be released. I was just curious about that and how overall this could affect your pipeline this year and next.
Yeah, it's a great question. I think we're the benefactor at the moment of a broad-based contribution from the studios. If you look at the Eilers reports that have just come out over the last few months, we're really leading the way in terms of high-performing new games in both core and premium. Our studios across the board are performing at a very high level, which just gives us lots of optionality. As Oliver mentioned, Jewel of the Dragon was kind of tailing off in terms of its sales cycle, which is a traditional thing that's been out for a number of years. It wasn't really a core driver of our momentum go forward. The game that has not been named speaks to the efficacy of the contagion exercise that we ran.
We found a game which, in the early workings, had leveraged some of the mathematical profiles. Out of an abundance of caution, those values did not end up in the final game. Like I said, out of an abundance of caution, we decided to eliminate the game and destroy that game from further production. That just speaks to the efficacy of the contagion exercise. We found something. We acted on it. We feel like we are in a good spot there. Broad contribution from the studios and a lot of firepower to continue to grow the business in 2025 and beyond.
Thank you.
Thank you. Our next question comes from Srihar Singh of Bank of America. Your line is now open.
Hey, Matt, Oliver. Thank you. Two questions from my side. One, how does this impact Dragon Train 2.0 launches? Could there be any delays on that launch because of these litigations and you being extra cautious on the launch? Second question is around new talent recruitment. Given you have to be more cautious about who you bring into the company, maybe at some point you also have to check their phones and personal phones. Does it in any way attract your ability to recruit at a speed that you've done in the past? Thank you.
Yeah. Great question. What was the first part, Oliver? Can you touch that?
Sorry. Yep. Sorry. Dragon Train 2.0. My apologies. Yeah. Thank you. No, it doesn't. We've just relaunched Dragon Train Grand Central into our social casino application. This is a game that was designed in a way that used math profiles that predated Emma. It's been submitted to Aristocrat for review. They have no trade secrets claim against the product. They've made no insinuations that the math leverages any of their trade secrets. We feel confident about that. Dragon Train 2.0 is being designed in the same way. Being done in full consultation with the courts and submitting to Aristocrat to verify there's no trade secrets in the game. Our intention is just to launch that game. It'll be at AGE later this year and looking to commercialize that shortly after. Our intentions around Dragon Train 2.0 remain intact.
When it comes to game designers, I feel like we use the terminology Goldilocks. You want to have the right amount of game design talent on your roster at any point in time. We feel like we're in that spot at the moment. We've added Kelsey. We've added a new designer to the Australian studios. We are always looking for free agent signings when it comes to top-tier game design talent. At the moment, I feel like we have the right amount of talent in the studios. For us, it's really about scaling up the resources under those studios. Like I said earlier, we have a broad contribution from studios across the globe at the moment. If anything, we have more than enough high-performing games to drive to our share aspirations. We have those enhanced protocols in place.
Go forward when designers join, and we will utilize them as appropriate when we sign new talent. I feel like we have the right amount of talent on the roster at the moment.
Thank you.
Thank you. Our last question of today's call is from Sam Bradshaw from Evans & Partners. Your line is now open.
Hi, Matt and Oliver. There's a line from an exhibit in a more recent filing that says the defendants have already agreed to provide information on mathematical and game design of Dragon Train, Huff and More Puff, the US version, and Monopoly, Take a Chance, the AMZ version. Would you just clarify why these later two games are included in that filing? Thanks.
I don't know if I'm in a position to speak directly to that. It's probably a question for the lawyers. We can circle back to you with an appropriate answer to that question.
No worries. Thanks, Matt.
Thank you.
Thank you. That will conclude the question and answer session. I will now pass it back over to management for any closing remarks.
Once again, I'd like to thank you all for joining us on the call today. At Light & Wonder, we are committed to competing fiercely but fairly. We want to ensure that we will not deviate from our core belief of building great games. We will vigorously defend ourselves against these alleged claims and manage issues within our control with a diligent approach. Our underlying business remains healthy, and I'm confident on the growth trajectory ahead. Thank you for being a participant. Have a great rest of your day.
Thank you. That will conclude today's call. Thank you for your participation. You may now disconnect your line.