Executive Summary / Key Takeaways

• Inspired Entertainment is undergoing a strategic transformation, pivoting towards a more capital-light, high-margin digital business fueled by explosive growth in its Interactive segment, particularly the innovative Hybrid Dealer product.
• First quarter 2025 results demonstrated strong underlying performance, with Adjusted EBITDA growing nearly 20% year-over-year despite seasonal and market-specific headwinds, highlighting operational resilience and margin expansion potential.
• Key strategic initiatives, including the planned divestiture of the capital-intensive Holiday Parks business and restructuring of the UK pub operations, are designed to reduce CapEx, improve free cash flow generation, and drive consolidated EBITDA margins towards the 40%+ target.
• The successful refinancing of the company's debt provides enhanced financial flexibility and incentivizes deleveraging, supporting the shift to a less capital-intensive model.
• While the Virtual Sports segment has faced recent challenges, management sees signs of stabilization and expects a return to growth in the second half of 2025, driven by new content and market expansion.

The Digital Pivot: Reshaping Inspired Entertainment

Inspired Entertainment, Inc. operates as a global B2B provider of gaming content, technology, hardware, and services to regulated lottery, betting, and gaming operators. With a history rooted in providing land-based gaming terminals and solutions, the company has strategically evolved, increasingly focusing on its digital offerings – Interactive and Virtual Sports – which are characterized by higher margins and lower capital intensity compared to traditional retail hardware. This strategic pivot is not merely an operational shift but a fundamental reshaping of the business model, aimed at enhancing profitability, improving cash flow conversion, and strengthening the balance sheet.

The company's business is structured across four segments: Gaming (land-based terminals and content), Virtual Sports (simulated sports content), Interactive (online casino games), and Leisure (gaming machines in pubs, holiday parks, etc.). While the Gaming and Leisure segments provide a stable base of recurring revenue, the digital segments, particularly Interactive, represent the primary growth engine and the core of the company's forward strategy.

In a competitive landscape featuring larger, more diversified players like International Game Technology (IGT), Light & Wonder (LNW), Aristocrat Leisure (ALL), and live casino specialist Evolution AB (EVO), Inspired carves out its position through a combination of established retail presence and targeted digital innovation. While competitors like IGT and LNW boast greater scale and broader market share across various gaming verticals, Inspired demonstrates agility and strong growth in specific high-margin niches. For instance, Inspired's Interactive segment has shown the ability to significantly outpace underlying market growth in key regions, reflecting the effectiveness of its content and account management strategies. Compared to peers, Inspired's segment-specific EBITDA margins, particularly in Interactive and Virtual Sports, are highly competitive, although its overall consolidated margins and Return on Invested Capital (ROIC) may trail some larger, more financially robust rivals like EVO, which benefits from a pure-play digital focus and minimal debt. Inspired's challenge and opportunity lie in leveraging its technological strengths and market relationships to scale its high-margin digital business while optimizing its traditional retail footprint.

Technological Edge: Fueling Interactive Growth

At the heart of Inspired's strategic pivot is its differentiated technology, particularly within the Interactive segment. The company's remote gaming server (RGS) platform enables the delivery of a broad portfolio of online casino games, accessible across various devices. A key technological differentiator is the innovative Hybrid Dealer product. This technology combines high-quality video streams with random number generator (RNG) outcomes, creating a unique player experience that blends elements of live dealer games with the efficiency and scalability of traditional online slots or table games.

The tangible benefits of Hybrid Dealer are becoming increasingly evident. Early deployments have shown sustained performance and increasing player engagement over time, unlike many traditional slot games that see performance tail off after launch. While specific processing speed or energy efficiency metrics compared directly to alternatives like pure live dealer studios were not quantified, the inherent nature of the technology suggests lower operational costs per unit of turnover compared to labor-intensive live dealer setups. This cost advantage contributes to the high Adjusted EBITDA margins observed in the Interactive segment (64% in Q1 2025, up from 54% in Q1 2024).

Inspired's R&D efforts are focused on expanding the Hybrid Dealer portfolio with new game types, including single zero and 4 Ball Extra Bet Roulette, and branded versions like the Caesars Palace Wheel of Wins. The stated goal is to offer a diverse range of Hybrid Dealer products that appeal to a broad player base and can be rolled out globally. Furthermore, the company is developing licensed content, such as NFL, NBA, and NHL themed virtual sports and potentially interactive games, specifically targeting markets like North America. These initiatives aim to enhance player engagement, attract new demographics, and provide unique offerings that differentiate Inspired from competitors.

For investors, this technological focus is critical. The success of Hybrid Dealer and the expansion of the Interactive content library directly contribute to the company's competitive moat, driving market share gains and fueling the segment's impressive growth trajectory. The scalability of these digital products, supported by ongoing R&D, is a key factor in the expected expansion of consolidated EBITDA margins and improved free cash flow generation.

Performance Reflecting Transition and Growth

Inspired's recent financial performance provides a snapshot of a company in transition, balancing the stability of its retail segments with the dynamic growth of its digital business, while also absorbing the impact of strategic adjustments and external factors.

For the three months ended March 31, 2025, total revenue was $60.4 million, a decrease from $62.3 million in the prior year period. This decline was primarily driven by a $2.8 million decrease in Gaming product sales (which can be lumpy) and a $3.6 million decrease in Virtual Sports revenue, partially offset by a strong $4.1 million increase in Interactive service revenue. Leisure revenue also saw a modest decline of $0.6 million, mainly due to the timing of the UK Easter holiday shifting into the second quarter.

Despite the slight revenue dip, the company demonstrated operational efficiency improvements. Cost of sales (excluding depreciation and amortization) decreased by $2.5 million, and non-staff related selling, general and administrative expenses decreased by $1.0 million, contributing to an increase in Net operating income to $1.6 million from a loss of $2.1 million in the prior year period. Adjusted EBITDA for Q1 2025 was $18.5 million, up nearly 20% year-over-year on a functional currency at constant rate basis, showcasing underlying business strength despite the reported revenue variance.

Segment performance highlights the strategic shift:

• Interactive: Continued its stellar growth, with revenue increasing by $4.1 million (51% on a functional currency basis) in Q1 2025, driven by recurring revenue growth in the UK and North America. This segment's Adjusted EBITDA margin expanded significantly to 64% in Q1 2025, demonstrating strong operating leverage.
• Virtual Sports: Revenue decreased by $3.6 million (29% on a functional currency basis) in Q1 2025, primarily due to a major customer's optimization efforts and regulatory changes in Brazil. This segment, while facing headwinds, maintains remarkable profitability with EBITDA margins in excess of 80%.
• Gaming: Total revenue decreased by $1.5 million (6% on a functional currency basis) in Q1 2025, driven by lower product sales, though service revenue increased by $1.3 million due to growth in the UK (William Hill (888) Vantage deployment) and Greece.
• Leisure: Revenue decreased by $0.6 million (3% on a functional currency basis) in Q1 2025, mainly impacted by seasonality related to the UK Easter holiday timing.

The significant improvement in Net Loss ($0.1 million in Q1 2025 vs. $6.4 million in Q1 2024) was largely influenced by a substantial income tax benefit of $5.1 million in Q1 2025. This benefit was tied to the reversal of a significant portion of the valuation allowance against deferred tax assets in Q4 2024, based on positive income generation and future taxable income forecasts in the UK.

Strengthening the Financial Foundation

Inspired's liquidity and capital structure are critical components of its investment thesis, particularly as the company executes its transformation strategy. As of March 31, 2025, the company held $39.0 million in cash, an increase from $29.3 million at December 31, 2024. Total current assets stood at $161.8 million, compared to total current liabilities of $113.1 million, indicating a current ratio of approximately 1.43x.

Cash flow generation saw a notable improvement in Q1 2025. Net cash provided by operating activities was $25.5 million, a significant increase from $6.0 million in the prior year period. This surge was primarily attributed to favorable working capital movements, including the collection of accounts receivable related to hardware sales from late 2024 and timing differences in accounts payable. Investing activities utilized $15.1 million, an increase from $10.1 million in Q1 2024, reflecting higher capital expenditures on property, equipment, and contract costs, partially offset by lower capitalized software spend. Financing activities used $1.7 million, mainly for finance lease repayments.

A key development post-Q1 2025 was the successful negotiation of a refinancing for the company's Senior Secured Notes, which were due in June 2026. The new 5-year sterling-denominated floating rate facility with Barclays (BCS) and HG Vora, expected to be in place in June 2025, replaces the existing bonds. This refinancing provides crucial maturity extension and enhanced flexibility. The initial interest rate is approximately 10% (6 points over SONIA), projected to decrease to around 9.5% by the end of 2025 based on the forward curve. Importantly, the new facility includes two step-downs in the interest rate spread tied to deleveraging milestones, creating a direct incentive for debt reduction. While the initial interest expense may be slightly higher than the previous fixed rate, management anticipates that a significant reduction in CapEx, targeting around $25 million annually (primarily for content), will result in being "well ahead" in terms of free cash flow.

The company's net leverage ratio stood at 2.9x at March 31, 2025, well within the RCF Financial Covenant requirement of 5.50x. The Senior Secured Notes are secured by a fixed and floating charge over company assets. The Board had authorized up to $25 million for share repurchases through May 10, 2025, with $12 million repurchased as of March 31, 2025. No shares were repurchased after September 2023, as the focus shifted to rebuilding cash post-restatement. Management has indicated an intention to revisit share repurchases as cash balances increase.

Strategic Outlook and Growth Catalysts

Inspired's outlook is centered on leveraging its digital momentum and executing its strategic plan to enhance profitability and free cash flow. The core investment thesis hinges on the successful transformation into a more capital-efficient business.

A major catalyst is the anticipated sale of the Holiday Parks business, identified as the segment with the highest capital intensity. While no definitive agreement has been announced, management hopes to complete the sale in the "relative near term" and intends to use the proceeds for deleveraging. Complementing this is the plan to restructure the UK pub business model, moving away from a capital-heavy terminal placement model towards selling equipment and generating recurring content and platform fees. These initiatives, regardless of the Holiday Parks sale outcome, are expected to yield cost reductions and contribute to achieving the target of consolidated EBITDA margins comfortably over 40%, potentially guaranteeing this outcome once the Holiday Parks sale is finalized.

The Interactive segment is expected to continue its strong growth trajectory, driven by the ongoing rollout of the Hybrid Dealer product globally (including planned launches in Loto-Quebec, Brazil, Pennsylvania, Ontario, and with additional operators) and expansion into new markets like West Virginia and South Africa. Management believes the Hybrid Dealer has significant untapped potential and will become a meaningful contributor in 2025.

The Virtual Sports segment, despite recent softness, is expected to return to year-over-year growth in the second half of 2025. This anticipated recovery is based on the stabilization observed in Q1 2025, the deployment of new licensed content (NFL, NBA, NHL), the rollout of localized content in key markets like Brazil, and expansion through retail (Greece, Turkey) and online lottery channels (Virginia Lottery).

In the Gaming segment, the completion of the 5,000 Vantage terminal installation at William Hill is expected to drive meaningful improvement in 2025, building on the high single-digit growth already seen from this customer. The rollout of new terminals in Greece and the performance of the Valiant cabinet in North America also contribute to the positive outlook for this segment. New long-term contracts in the Leisure segment (Buzz Bingo, MOTO, Welcome Break) provide revenue stability.

Overall, the combination of high-margin digital growth, strategic divestitures/restructuring, cost efficiencies (e.g., $3 million annualized savings from manufacturing consolidation), and a lower CapEx profile is expected to significantly improve free cash flow conversion, potentially reaching the 30% of EBITDA range. Management is comfortable with the current consensus estimates for 2025, signaling confidence in the company's ability to deliver improved results.

Risks and Considerations

While the outlook is promising, several risks and challenges warrant investor attention. Execution risk is paramount, particularly in successfully completing the Holiday Parks sale and implementing the planned restructuring of the pub business. Delays or unfavorable terms could impact deleveraging and margin expansion timelines.

The Virtual Sports segment's volatility, demonstrated by the recent decline tied to a major customer and Brazilian market changes, remains a concern. While stabilization is noted, a sustained return to growth is dependent on the successful launch and adoption of new content and market entries, which have faced delays.

Macroeconomic conditions, particularly in the UK retail sector, could impact the Gaming and Leisure segments. Foreign currency exchange rate fluctuations also pose a risk, given operations in multiple currencies, potentially impacting reported results and balance sheet translation.

Furthermore, the previously disclosed material weaknesses in internal controls over financial reporting, while being remediated, highlight operational risks that need to be addressed to ensure reliable financial reporting. Although the SEC inquiry related to prior restatements has concluded without enforcement action against the company, legal matters in the ordinary course of business could still arise.

Finally, while the debt refinancing provides flexibility, the floating rate exposes the company to interest rate risk, although management anticipates downward rate trends and benefits from deleveraging.

Conclusion

Inspired Entertainment is at a pivotal juncture, actively transforming its business model to capitalize on the high-growth, high-margin digital gaming market. The strong performance of the Interactive segment, fueled by innovative technology like Hybrid Dealer, is the primary engine driving this evolution. Strategic initiatives to divest capital-intensive assets and restructure retail operations, coupled with cost efficiencies and a lower CapEx target, are designed to fundamentally improve the company's profitability profile and free cash flow generation, pushing consolidated EBITDA margins towards the 40%+ mark.

While challenges remain, particularly in stabilizing and growing the Virtual Sports segment and executing the planned retail transitions, management's confidence, supported by recent performance trends and a successful debt refinancing, underscores the potential for significant value creation. The investment thesis for $INSE rests on the successful execution of this digital-led transformation, leveraging technological differentiation and strategic focus to navigate competitive dynamics and unlock enhanced financial performance in the coming years. The trajectory of Interactive growth, the impact of strategic divestitures, and the return to growth in Virtual Sports are key indicators for investors to monitor as the company strives to realize its full potential.