February 21, 2023 - 5:30pm EST by
2023 2024
Price: 62.00 EPS 0 0
Shares Out. (in M): 94 P/E 0 0
Market Cap (in $M): 6,025 P/FCF 12.6 10
Net Debt (in $M): 2,597 EBIT 0 0
TEV (in $M): 7,624 TEV/EBIT 0 0

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  • Turnaround
  • Ability to reinvest at higher ROIIC
  • TAM
  • Management Change
  • Oligopoly


Light & Wonder LNW


We believe Light & Wonder (LNW) formerly Scientific Games is a high-quality business operating in a global oligopoly with significant barriers to entry and high switching costs trading at 10x times 2024 cash flow. Today’s price implies little to no value being ascribed to LNW’s two digital assets which we view as free call options that are highly synergistic to the base business while also underestimating LNW’s core business which is poised for several years of accelerated growth and market share gains.

LNW, formerly Scientific Games (SGMS), presents a unique opportunity in public markets. With the business and cap table undergoing a period of substantial change in the last 18 months, investing in LNW today is equivalent to investing in a newly public company which has bypassed the IPO process. 

Following a full refresh of LNW’s BoD and C-suite, LNW is in the early days of transitioning itself from a diversified, poorly integrated, and highly levered holding company (peak leverage of 10.5x in Q1/21) while also repurchasing 5% of the company YTD in 2022. We believe additional buybacks will accelerate if the share price falls. Today LNW into an omnichannel gaming company with 75% recurring revenue, a captive install base and cross-channel synergies.

LNW’s primary Gaming business designs, develops, manufactures, markets and distributes a portfolio of gaming content, products and services for physical, land-based casinos. Casino capex budgets are only now returning to 2019 spending conditions and poised for a growth cycle following 2 years of negligible spending while we believe LNW is set to take additional share at the high end of the market.

LNW’s two other businesses are focused on digital casino games (iGaming) and mobile/social gaming (SciPlay). We feel that iGaming is highly synergistic with LNW’s land-based casino business and competitively positioned to win substantial market share. We believe the TAM for iGaming will prove to be much larger than land-based casinos as US states begin to legalize digital casinos, following a similar path as sports betting which is now legal in ~80% of the US.

No longer capital constrained, with a new BoD and c-suite poached from the #1 player in the industry, we believe LNW has assembled an all-star team. Today we are paying 10x 2023 FCF for a business poised to take market share within a global oligopoly, with a customer base that is emerging from trough spending levels, this is highly attractive in our view. Additionally, we are getting two businesses with macro-growth tailwinds, large TAMs, high contribution margins and FCF conversion for free. We see LNW as a highly asymmetrical investment with modest downside from current levels and model a 30% 5yr IRR or 3.7x MOIC on our investment.  

Industry Overview

  • Today the market for service providers for the land-based casino industry is effectively am oligopoly with ~70% of the market split between LNW, Aristocrat and IGT. Two thirds of IGT’s revenue and >80% of EBITDA comes from i/lottery and sports betting. IGT does compete head-to-head with LNW and Aristocrat in slots and casino services. IGT has consistently lost market share over a multiyear period. Today we believe IGT’s competes primarily at the low end of the market focused on regional and tribal casinos along with Everi. The premium end of the market is largely a duopoly between LNW and Aristocrat.
  • Land-based gaming is stable with GDP+ annual growth which we expect to be elevated in the MSD/HSD range for the next several years following pandemic shutdowns. Gambling is not a cyclical industry with aggregate casino revenues declining only mid-single-digits during the GFC.
  • Historically the land-based casino content services industry was created and manufactured offshore, with games and cabinets created in Malta and other low-cost jurisdictions with labor arbitrage from cheaper engineers and designers. Barriers to entry were low and the industry largely competed on price, translating to lower margins and few scaled competitors.
  • ~20 years ago, industry regulation substantially changed industry dynamics. Regulators realized the addictiveness and dopamine rushes enjoyed by players and sought strict and far-reaching regulatory oversight for the casino industry.


Barriers to Entry

  • Given industry consolidation, today high regulatory capture is extracted by both casino operations and casino service providers. State governments and regulatory agencies control almost every aspect of the casino industry: the number of casinos permitted, sizes and locations of casinos, types of games allowed, numbers of machine and table games allowed, tax rates, fees, and minimum capital investment etc. The timeline for launching new land-based games has gone from a 90-day regulatory approval process to upwards of 2 to 3 years today.
  • As the brick & mortar casino industry became more mature, the number of casinos shrunk and demand consolidated amongst a small group of large-scale casino owners such as Sands, MGM and Caesars. This led to a smaller base of buyers for land-based gaming content who also sought to reduce their number of physical suppliers and service providers.
  • Given the higher regulatory oversight faced by the industry leading to both slower game development and inventory turns of cabinets on the casino floor, casino operators placed a high degree of trust in a select few diversified gaming and slot machine providers. Casinos needed to ensure adequate revenue yields on their existing install base, scheduled fleet servicing and a steady pipeline of new content to overcome the lag between games in development translating to revenue monetization on the casino floor.
  • Service providers such as LNW no longer had to go after the long tail of independently owned casinos and could instead focus on these large-scale casino groups by signing what amounts to master service agreements.  Companies such as Light & Wonder, IGT and Aristocrat gradually and consistently took market share by offering bundled pricing and a depth and breadth of physical and digital services that couldn’t be replicated by smaller players.
  • Following this period of heavy consolidation of both demand and supply, LNW’s land-based casino margins have gone from ~20% to ~50% over the same 20-year period. Scaled players such as LNW benefit from numerous structural competitive advantages.
  • These include physical inventory and digital IP procurement advantages, A/B beta game testing in direct partnership with casinos and better revenue sharing splits, as scaled, incumbent providers command a higher percentage of the casino floor. LNW also sells high margin ancillary products such as card shufflers and the casino’s core operating system. Casino’s run on a CMS (casino management system) which acts as the brain of the casino is equivalent to an ERP software platform such as SAP or Oracle that is specifically built for the casino industry, allowing casinos to host and manage all day-to-day operations within its CMS.
  • Today land-based gaming is a global oligopoly. LNW and its two major peers make up >70% of the total gaming sales, ~90% of the premium leases and systems markets, and ~80% of tables sales. The top providers have dominated market share and we believe the current industry structure will largely remain status quo given strong barriers to entry and scale along with high switching costs.

High switching costs

  • Firstly, it’s important to understand the relationship between the casino and the casino operator.
  • A casino owner such as Sands or MGM is three things. 1. It’s a globally recognized brand 2. It has highly attractive real estate (owned and/or leased) 3. It’s a retail business. The physical casino amounts to a retail store, focused on maximizing the unit economics of its store by boosting foot traffic and sales per sqft.
  • Casinos don’t want to manage day-to-day operations, they don’t invest R&D into new games, they don’t handle loyalty services, food and beverage etc. Effectively all services are outsourced to 3rd parties.
  • At their core, casinos offer largely undifferentiated customer experiences and an ease of substation, there are very few casinos in the US that don't have another casino within 20 minutes. This puts LNW in the middle of a commoditized supply of casinos and a fragmented customer base. Casinos NEED to offer the newest content to maintain/grow market share.
  • Casino traffic is driven by a combination of carefully crafted floor plans and brand-recognition of original gaming franchises and licensed third party content. The casino is solely focused on maximizing sales via net take rates or yield per game which depends on foot traffic and game utilization. In order to ensure this casinos need to offer a content slate that is highly current with the newest hit games while also offering an adequate level of depth and breadth of games.
  • Service/content providers such as LNW are paid % of GGR (gross gaming revenue), GGR is total wagers bet less payouts won by the customer. GGR is in the LSD for physical casinos and HSD for digital. Within the casino there is no direct COGS for the casino on this revenue, only capex for the initial purchase and service fees for ongoing revenue while digital gaming lacks the upfront capex requirement.
  • Casino service providers are true partners with the casino with the shared goal of maximizing sales per square foot. This is driven by a combination of revenue driving and cost saving services. Revenue is driven by maximizing yields on slots and games, popular games drive high foot traffic leading to higher revenue.  
  • Casinos barriers to trust are high for new providers. There is finite space on the casino floor, recall this is a retail store with physical space for only x amount of inventory (games, slots and tables). Slots are by far the most profitable area of the casino.

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  • The buyer of gaming cabinets at a casino is the Vice President of Slots. The mutual trust between the buyer (the casino) and seller (service provider) leads to long-term and established relationships that are hard to displace. Given the outsized profitability of slots, the risk of swapping out an incumbent for an unknown provider is very high.
  • Brick-and-mortar casino owners must monetize every square foot of the casino floor. Featured games that perform the best will get floor space. The operator is only going to place games on the floor that are going to produce the most revenue per cabinet given total revenue growth is limited by physical floor space.
  • Hit content is not known in advance, there are flops. A casino is not going to swap out stable Gross Gaming Revenue for an unknown provider, the risk is too high and the floor space is finite. Casinos are highly fixed costs businesses so the decremental margin impact on lost revenue for underperforming games/slots is high.
  • Poor games must be quickly swapped out and the best chance of finding the next hit cabinet comes from the guys who’ve built all the previous winners. Off a captive install base, LNW also captures recurring services revenue. Broken games must be serviced quickly to ensure minimal downtime, and LNW can choose to sunset previous generations of their machines. By no longer supporting the machine from a servicing standpoint, casinos are driven to upgrade their floorplans to maintain sales per square foot.
  • As discussed, the new content pipeline into casinos takes up to 2-3 years to stay in line with regulatory requirements. It takes a long time to get a property to commit to rearranging their floor to place your games, these are not trivial decisions that are taken lightly by casino operators.
  • From an upstart competitor’s standpoint, the cash conversion cycle for gaming studios without an existing portfolio of revenue-generating IP is extremely poor, and there is no guarantee that the casino will lease or purchase the game once its completed. It is likely years before seeing any return on investment and the casino would demand a higher percentage of gross gaming revenue to compensate for the risk of allocating floor space to an unestablished content provider. These dynamics have kept venture and growth capital from flowing into content creation for casino-focused end-markets.

Scale Advantage

  • We believe that LNW has the industry’s most complete end-to-end full-service offering, by combining games/slots/cabinets with a casino management system. CMS provide a depth and breadth of products and services that cannot be replicated by subscale competitors.
  • The power of the bundle for scaled land-based casino service providers is similar to enterprise-wide offerings such as Microsoft, where the end customer receives a higher price to value for the bundle opposed to piecing individual services together.  
  • Much like software, the lifespan of casino games and content is evergreen but the upfront cost of building is very high. This requires initial capital and scale to expand existing IP libraries. Scale allows game development costs to be spread against higher cabinet and machine order volumes, lowering cost of goods sold per unit and improving gross margins. Purchase volumes contracted in advance from casino operators allow casino service providers to buy raw materials in bulk for their hardware components from international supply chains and further lower low cost of goods sold. Scaled incumbents can simply produce revenue-generating units at a higher margin than new entrants.
  • Incumbents have relationships cemented with key personal at all casinos in the U.S. and through the world. Incumbents have their licensing done and in line with ongoing changes to regulatory requirements. Incumbents such as LNW have a pipeline set up with all the testing labs for new games, incumbent IP gets in and out of testing labs with no delay and detailed A/B test results allow for faster game development, stronger in-game monetization and higher ROI on R&D development spend. As casino-IP transitions to omnichannel delivery, LNW will be able to leverage its initial investment to monetize franchises across its Gaming, iGaming and social and mobile gaming businesses, driving higher contribution margins and returns on incremental capital.

Leadership Transformation

  • LNW’s primary competitor across most business lines is Australian-based Aristocrat Leisure Ltd. Historically Aristocrat has been the better business, with higher gaming yields and a better content library. Aristocrat has gradually and consistently taking market share within the gaming machine and cabinet space.
  • Part of Aristocrat’s success has come from taking a venture capital approach to intellectual property. Aristocrat was successful in locking in a wide variety of cheaper licensing agreements well before they become internationally recognized franchises sought after by competitors and commanding high upfront premiums.
  • Aristocrat’s approach to gaming content has been very granular and data driven with a playbook and framework in place to drive content ROIC. Aristocrat has historically seen upwards of 80-90% of newly released games being accretive to blended ARPU. Multiple years of successful content allowed Aristocrat to take FCF and reinvest it back into the business. Historically Aristocrat has been able to build better and innovative cabinets while being first to market with new generations of gaming devices such as the dual screen slot machine.
  • This contrasts with legacy LNW which has had to compete for scarce internal resources while its levered parent holdco used the majority of its FCF to pay down its 10 turns of debt,
  • Aristocrat is a $5.5 billion top line business on $300m in capex that produces 7-8% revenue growth on ~20% ROIC. LNW is a ~$2.5 billion business that spends ~$250m in annual capex at half the ROIC of Aristocrat, we expect ROIIC>ROIC going forward.
  • The good news for LNW shareholders is it is now run by the same team that took Aristocrat for the #3 player in the industry to a firmly established #1. LNW can now take industry leading best practices from a superior competitor with an install base of 50,000 slots and apply it to its own business.
  • Over the last 18-24 months LNW has hired nearly 50 executives away from Aristocrat including its Chairman of the Board, CEO, CFO and Head of Gaming. Management has since removed >$100m in costs out of the business.
  • Our research indicates the parachuting Aristocrat’s senior team has been well received by the market given Aristocrat’s long-term track record as the #1 content provider in land-based casinos. LNW’s c-suite is the same team that has a history of creating significant value for casinos with extremely successful content and industry leading innovation. We believe LNW now has the best team in the industry and this will soon translate into market share gains in land-based gaming for LNW as its content library improves with higher monetization of original games and faster development cycles.  
  • No longer capital constrained, management has restructured its innovation pipeline from what was a highly decentralized R&D program. R&D has now been guided to 12% of revenue, in line with Aristocrat. With the industry shifting towards omnichannel, LNW now has the ability to accretively leverage new IP and content across all 3 channels of its business with successful land-based casino content quickly being repositioned for iGaming and mobile gaming channels at low incremental costs. 

Business Overview

Land-based Gaming

  • Today LNW remains a primarily (~62% of revenue and ~85% of EBITDA) a land-based casino service provider, an industry which is a global oligopoly across most product lines between IGT, LNW and Australian-based; Aristocrat. LNW has historically played second fiddle to Aristocrat with a lower success rate on internally generated content translating to lower machine yields and revenue growth.
  • LNW’s core business is a GDP-type grower which the potential for MSD/HSD growth over the next few years followed delayed capex spend by casino operators during and immediately following the pandemic. Casino capex is the primary driver of Gaming segment revenue for LNW and we are emerging from a 2 year period of 0 casino capex against gaming cabinets that have historically followed a consistent refresh cycle based on a 6-7 year useful life for gaming cabinets and machines.
  • Revenue is consisted primarily of the sale of gaming machines and cabinets (27% of 2021 segment revenue) which drive an install base for gaming operations revenue (45%). 

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  • Revenue is driven by the size on the install base multiplied by average daily revenue per unit (ADRPU) which is 4-5x higher in North American than in the rest of the world.
  • Within casino floors are areas offering premium gaming content, accessible to only VIP customers. This casino within the casino has a disproportionate impact[AB3]  on the casino’s gross gaming revenue, VIPs can represent up to 10x the GGR of retail players.LNW has posted 8 consecutive quarters of growth in the premium games category, premium games represented 45% of LNW’s install base as of Q3/22, an all time high.
  • We believe LNW will continue to take share within premium games, following a ~7-year period in which LNW’s levered cap table allowed it to create only small amounts of new content. LNW has taken cost savings achieved in gaming and used the proceeds to reinvest back into R&D, hiring aggressively including several well-known industry veterans. Today LNW’s ARPU is ~25% lower than Aristocat, we believe this gap will close as LNW refreshes and expands its content library.
  • Gaming systems revenue is a combination of hardware and software maintenance services while Table products are highly profitable and offer products used at the casino table such as card shufflers.
  • We believe LNW’s Gaming revenue can grow MSD/HSD at 50% EBITDA margins over the medium term. 


  • iGaming takes games and content outside of the casino and into a digital format played on mobile, ipads and PC’s.
  • We think the bear case against iGaming (digital casinos) largely hinges on cannibalization of existing land-based casino revenues and the lack of continued legalization.
  • Today iGaming (digital casinos) are legal in only 7 states account for ~13% of the population. We believe legalization will follow a similar glidepath as Sports Betting which is already legal in ~80% of US states following a Supreme Court ruling in 2018 that removed the ban on single-game betting. We believe the TAM for iGaming is substantially larger than sports. In states which mutually allow sports betting and iGaming, tax-related iGaming revenue has outpaced sports betting by 2-3x. There are simply too many tax dollars available for state governments to not begin the process of iGaming legalization. We think this dynamic accelerates a recessionary environment as property and income taxes plateau, forcing governments to seek out alternative sources for tax revenue. 

  • The current sample set suggests that iGaming doesn’t cannibalize share from land-based, in fact it has driven increased wallet penetration across casino’s core customer base by up to 1.5x. States with legalized iGaming have experienced an increase in total land-based casino revenue, driving higher customer lifetime value and improved unit economics. Players well versed in the content library of land-based casinos recognize brands and content from physical casinos while customer databases and loyalty programs that allow for single sign on and allow players to be aware of game plays, features, and bonuses across land-based and digital games.
  • Two weeks ago Ontario Gaming release its most recent quarterly report. Average annualized spending per user (gross betting volumes) is already at $2,000 and growing 18% quarter over despite the market being in its infancy after only going live this past April.
    • $2k in GGR vs $55k median income in Ontario or 3.6% of median income 
    • In the EU (the most established and mature digital gaming market) this same metric is ~10% of median income and continues to grow
    • US GGR growth in legalized states has been pretty staggering: 
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  • As casinos shift towards omnichannel (land-based + online casinos) we believe land-based incumbents such as LNW have the right to win in iGaming offering a unique mix of first party and third-party content.
  • LNW is able to leverage its existing MOAT in land-based gaming given serving the same base of customers in iGaming. Given existing relationships with casino operators and high barriers to trust we don’t believe the list of content suppliers for iGaming will look much different from the oligopoly witnessed in physical casinos.
  • LNW is the leading provider for iGaming aggregation. The company partners with >300 independent operators and has a relationship with 60+ partners
  • Land-based content providers have vast IP libraries which can be leveraged across both physical and digital channels with lower incremental costs than net-new content. Due to this strong IP, LNW’s yields per user are higher than less popular games.
  • Outside of first party IP, LNW is well positioned to act as a content aggregator and leverage its MOAT in distribution. Think of LNW as Netflix and 3rd party iGaming content as an independent film studio in Korea which is trying to secure international distribution for a film that is post-production but pre-monetization. By licensing its content to LNW, the studio gains a much quicker time to market, providing immediate access to a large customer base to monetize against while avoiding a capital-intensive launch with high customer acquisition and marketing costs.