Brightstar Lottery PLC 2026 Q2 Earnings Call

Thank you all for joining us on Brightstar Lottery second quarter 2026 conference call, which is being hosted by Vince Sadusky, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions. We are presenting from multiple locations today and would appreciate your patience if we encounter any technical difficulties. During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings. During this call, we will discuss certain non-GAAP financial measures.

You'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our investor relations website. Our statements are as of today, August 4th, and we have no obligation to update any forward-looking statements we make. Now I'll turn the call over to Vince.

Thank you all for joining us. Our better-than-expected Q2 profits were driven by an increase in global same-store sales and strong cost discipline, even as we continue to invest in high-return initiatives. We generated significant cash in the first half of the year, which not only helped to fund the final Italy Lotto license payment in Q2, but also the $140 million of capital returned to shareholders in the year-to-date period, all while continuing to maintain a solid balance sheet. We executed well against our strategic priorities in the first half of the year and expect this good progress to deliver stronger revenue and profit growth in the second half of the year. Global same-store sales increased 1.5% in the second quarter, a slight acceleration from Q1's performance on stronger U.S. sales.

The improvement in U.S. sales primarily came from stronger multi-state jackpot performance and, to a lesser extent, better instant and draw game sales. Some of the strongest growth in instant and draw games came from New Jersey and Indiana markets, where we have more direct involvement with day-to-day lottery operations. We've expanded retail points of sale and strategically deployed vending machines and digital signage, all proven initiatives that are delivering encouraging results. We intend to scale these initiatives across the broader portfolio over the next several quarters. Italy same-store sales growth was fueled by instant tickets, including the relaunch of multiplier games, this year's featured summer bundle, and the continued success of the new €30 game. Recent multi-year extensions with the Oregon and Washington State lotteries have improved the long-term visibility we have for our business. iLottery continues to be an area of substantial growth.

Wagers were up 22% in the first half of the year. In Italy, 23% iLottery growth was led by eInstants, especially the €30 and multiplier games. The 29% iLottery growth in the U.S. included strong expansion in Kentucky and Georgia and the excellent performance of our eInstant content in Michigan and Virginia. We've achieved several milestones with our Italy B2C expansion efforts. At the end of April, we launched a significantly enhanced MyLotteries PLAY app, featuring a full range of digital gaming options across eInstant, eDraw, iCasino, and sports betting. It also includes new bonusing and loyalty programs in addition to live chat capabilities. It is a best-in-class offer with a compelling user experience. We recently completed the upgrade of retail point-of-sale terminals at over 33,000 locations throughout Italy.

The new terminals have much faster processing capabilities, which should improve sales velocity during peak play time and support future game innovation initiatives. The retail network is a strategic asset we intend to leverage to drive digital adoption and traffic to the MyLotteries PLAY app. To date, we've recruited about 23,000 retailers to help drive digital account activation. Their player engagement efforts begin this month and go into September. We've also had important developments in emerging markets. In São Paulo, we are live with digital lottery operations. Our team was able to deploy the network just 6 months after executing our 15-year concession. The opportunity ahead is substantial. With 46 million residents and approximately one-third of Brazil's gross domestic product, São Paulo is the country's largest and most prosperous state.

The successful launch of digital operations establishes the foundation for an entirely new lottery operation we are building from the ground up. The launch of retail lottery operations is planned for later this year. We believe São Paulo has the potential to be a significant long-term growth opportunity for our business. Instant ticket printing has been another area of focus and investment, including a new press that went live a year ago. The incremental capacity has supported a double-digit increase in standard units produced in the first 6 months of the year, including good growth with customers in Texas, France, and Poland. Our innovative Gleam and its Infinity games are important drivers of this higher production volume. In addition, we secured multi-year FM contract extensions in Mauritius and Slovakia, building on our decades-long relationships with both. The first half of the year was defined by meaningful progress on foundational initiatives.

Much of that work has been investment-led and, as expected, has not yet delivered significant revenue or profit contribution. Looking ahead, we expect that equation to shift. Revenue, profit, and cash flow are poised to inflect as these initiatives begin contributing more meaningfully. While some will scale faster than others, each supports the strong annual free cash flow we expect to generate once we move beyond the current peak CapEx cycle. We estimate Brightstar can deliver more than $400 million in annual free cash flow before upfront license payments and after minority distributions. That expected cash generation reinforces our commitment to growing shareholder returns. This cash flow outlook also highlights Brightstar's compelling current valuation, representing about a 20% cash flow yield, while our dividend yield is approximately 9%.

Non-cash service revenue amortization impacts adjusted EBITDA, adjusted EPS by $0.94 this year, which more than covers the current annual dividend. The remaining EPS provides ample capacity to maintain or potentially grow shareholder returns. Adjusted EPS, excluding service revenue amortization, provides another attractive view on valuation. Based on the 2025 actuals, Brightstar is trading at just seven times that metric. Altogether, the Brightstar story is straightforward. The heaviest investment period is largely behind us. Our growth initiatives are in place and beginning to scale, and the market has not fully reflected or priced this inflection point. With that, I'll turn the call over to Max.

Thank you, Vince, and hello to everyone joining us on the call today. Brightstar delivered second quarter revenue that was in line with expectations and profit that was better than expected. This drove very strong cash generation that was used to fund important investments in growth and shareholder returns. In the first six months of the year, we have laid the foundation for accelerated top line and profit expansion. Second quarter revenue was $584 million as reported. Excluding the service revenue amortization increase of $47 million, revenue was flat year-to-year as reported, improving to 2% growth net of the U.K. transition, which is an important metric to focus on going forward, as I explain in a second. Wager-based revenue was in line with the prior year at constant currency. Global same-store sales growth and favorable mix in the U.S. was offset by the impact of the U.K. transition.

The second quarter was the last full quarter of year-to-year comparison of the U.K. transition. There will be only about a month worth of impact in the third quarter. Other service revenue increased 5% year-over-year. I'd like to point out that much of the growth from our Italy B2C expansion effort will be categorized as other service revenue. This includes items like digital distribution revenue earned on iCasino and sports betting wagering on My Lotteries PLAY app, and other B2C services we may add to round out our retailer services offering in the future. Product sales were down $8 million compared to last year, when we had elevated hardware sales in multiple jurisdictions. Product sales are naturally lumpy, and we expect a much more meaningful contribution from product sales in the second half of the year.

As an example, we expect a two percentage point incremental impact on growth coming from product sales in Q3 on top of the current same-store sales run rate performance. Second quarter adjusted EBITDA was up 4% to $286 million, which was better than expected. That translates to a reported EBITDA margin of nearly 49% and 42%, excluding upfront license fee amortization, in line with Q1 and better than anticipated. Key drivers were global same-store sales growth, ongoing benefits of our OptiMa cost savings program, and certain expense recoveries. This profit increase was achieved despite the U.K. transition and our continuing investment in growth initiatives across the organization. Second quarter income from operations of $56 million experienced a turnaround from a loss of $60 million in the second quarter of last year, despite a $47 million impact from service revenue amortization.

This was due primarily to adjusted EBITDA growth, lower restructuring costs compared to last year, FX, which is a non-cash positive impact from a change in the euro/dollar exchange rate on debt balances at the parent company, and a lower tax provision, which reflects both the structural improvements we have made over the last two years to optimize our effective tax rate and the benefit from a discrete tax item. Our expected full year 2026 effective tax rate remains in the mid to high 30% range compared to 55% in the prior year and heading closer to our normalized rate in the mid to low 30s. We expect full year 2026 cash taxes in the range of around $150 million versus $220 million in the prior year period. Cash generation was strong in the first half of the year, funding important investments in future growth and shareholder returns.