Description

Investment Summary

I am long NeoGames (NASDAQ: NGMS; “NGMS”, “NeoGames” or the “Company”), a provider of vertical enterprise software and content (games) in the digital gambling industry and the largest of three online lottery (iLottery) platforms in the U.S. with ~70% market share of wagers.

I believe the Company is mispriced now because it is a relatively low float / illiquid small cap that was grouped in a popular retail “theme” trade (online gambling) that has been oversold in 2022’s macro-driven sell off – Roundhill Sports Betting and iGaming ETF (BETZ) has declined 47% YTD and NGMS shares are down 46% YTD (even after a ~15% price increase over the past two days driven by a new content deal with the Georgia state lottery). Furthermore, the Company’s new contract wins can be large relative to the current size of the Company, making the Company difficult to model with high precision. Adding insult to injury, NGMS has messy financials due to (i) most of NGMS’ growth being driven by a JV (“NeoPollard Interactive” or “NPI”) that is accounted for using the equity method and (ii) a recently closed merger with Aspire Global (“Aspire”), which necessities diligence on NGMS core business, NPI, and Aspire. In my experience, during times of market turmoil there is a combination of motivated sellers and relatively few market participants doing work on complex situations, which make opportunities such as this one interesting.

At $15.25 / share, NGMS can be purchased for ~9.0x normalized EBITDA of ~$75mm, which I believe is far too cheap for a market leader in a large, unpenetrated market with an oligopolistic market structure that exhibits higher barriers to entry.

Assuming a constant multiple, I believe shares will be worth ~$25 / share in 2027 based on limiting NGMS and NPI’s growth within the existing contract base (MSD and LDD, respectively) combined with LDD growth from Aspire. By 2027, I also believe (i) the launch of eInstant games in North Carolina (existing NPI customer, but only for draw-based games) could generate $11mm of free cash flow to NGMS and ~$85mm of value (20x FCFE multiple), or ~$2.50 / share and (ii) NPI’s impending Ohio iLottery contract could generate an additional $21mm of free cash flow to NGMS and ~$175mm of value (20x FCFE multiple), or ~$5.00 / share. This implies value of ~$32.50 / share in 2027 (~16% IRR) and that the market currently offers (i) synergies from the Aspire acquisition, (ii) the contract with the Brazilian State of Minas Gerais, (iii) future contract wins, and (iv) both existing platform value + the potential for accretive M&A / capital allocation activities for free.

With several new contract wins / accretive capital allocation and multiple expansion to a more reasonable 15.0x EBITDA (for a business of this quality), I believe shares could reach ~$55 / share in 2027 (~28% IRR) and that the Company is a crown jewel that is likely to command a premium multiple from a strategic buyer if the company is sold.

Summary Thesis Points

1.      Large, Unpenetrated Market: There are currently 48 legalized lottery jurisdictions in the U.S. (45 of the 50 U.S. states, plus Washington DC, Puerto Rico, and U.S. Virgin Islands), but only 10 currently allow iLottery

a.      Accelerated rollouts. NGMS was able to ramp up online penetration within Virginia and New Hampshire substantially faster than they did in Michigan, which implies they have systematized their iLottery program and operating methodologies with increased effectiveness

2.      Increased iLottery Adoption by States: I believe many more states will legalize iLottery and eventually that iLottery approvals will converge with retail lottery approvals (i.e. nearly all jurisdictions that run a regulated lottery will offer iLottery capabilities)

a.      State Budget Shortfalls: Many U.S. states face a difficult combination of both strained financial positions and falling standards of public education / services and are likely to turn to iLottery activities to increase revenues. In a recession, states typically must face falling revenues, increasing the need for additional revenue sources (increasing the likelihood of iLottery legalizations)

b.      iLottery Acquires Incremental Lottery Customers: Certain players will only participate in the lottery via electronic / mobile mediums

                                                    i.     Retail lottery transaction journey possesses high friction

1.      Many state laws require consumers to purchase lottery tickets with cash (credit card transactions outlawed). Even if state laws allow digital payment methods, many retailers require cash due to a combination of low margins on lottery tickets and relatively high processing costs

2.      Many large retailers (Walmart, etc.) do not sell lottery tickets at checkout / in the flow of consumer foot traffic

3.      E-commerce’s continued market share gains (including new transaction methods, such as grocery delivery and curbside pickup) further pressure brick & mortar lottery ticket sales. These new transaction methods don’t have a framework to enable physical lottery sales

c.      Increased Retail Lottery Engagement: iLottery offers omnichannel capabilities that accelerate retail lottery sales, rather than cannibalizing them

3.      NPI is the best positioned entity to capitalize on iLottery adoption in the U.S. and NGMS is the best way to gain exposure to NPI. NPI’s currently commands a dominant market position of nearly 70% of gross iLottery wagers in the U.S. due to a best-in-class omnichannel offering and track record of driving increased engagement and total lottery spend for states on a holistic basis

4.      North American iLottery Success is transferable to other large, international markets. (i) high demand – Many state, local, and federal governments of international countries are also facing strained budgets, (ii) NPI’s highly referenceable customer base and track record lends itself to future contract wins based on the herding behavior and lack of private sector incentives from state-sponsored organizations and employees, and (iii) the Company’s track record of expanding into Canada with a new offering (holistic iGaming, lottery, and sports betting), the legacy Europe operations, and the recently signed Brazil deal provide comfort.

a.      Even if NGMS only expanded within the U.S., returns would be strong from today’s market pricing

5.      What’s bad is good. This investment opportunity has an element of anti-fragility, because there is a higher probability of swift legalization / regulation of iLottery during a recession if and when state budgets get tighter

U.S. Lottery / iLottery Market

My write-up focuses on the legacy NeoGames / iLottery business because the majority of current and future earnings power and value resides within this segment, which I believe can grow revenue at 20%+ p.a. with high operating leverage for the foreseeable future.

Lotteries have a long history in the U.S. dating back to their role in helping fund the 13 colonies. Due to several scandals and political corruption, lotteries were generally illegal in every state in the country from the late 1800s / early 1900s until 1964, when the New Hampshire lottery was launched. Today only the U.S. states of Alabama, Alaska, Utah, Nevada, and Hawaii do not have lotteries. I do not see a long-term path to legalization in Utah or Nevada, but Alabama has a lottery legalization bill that will be proposed at the next legislative session in March 2023 and the worldwide megatrend is toward legalization and regulation of gambling activities. States have a monopoly on overseeing / administering the lottery within their jurisdiction, they flexed their monopolistic lottery programs to generate ~$24 billion of cash flow in 2020, which is primarily used to fund public education systems.

NGMS and NPI customers are the state-sponsored agencies, commissions, boards, and / or corporations who oversee lotteries by law / statute. These customers are conservative due to the importance of the lottery to government budgets, highly regulated nature of the industry, and organizational and employee incentives skewed toward career risk minimization, which creates herding behavior when contracting with private sector lottery operators / technology vendors (and virtually eliminates in-sourcing risk, which is a unique dynamic in the B2B gaming / software space). As a consequence, three companies with long operating and regulatory compliance track records dominate the retail lottery systems market in the U.S. – International Game Technology PLC (NYSE: IGT), Scientific Games (owned by Brookfield Business Partners; NYSE: BBU)[1], and Intralot (ATSE: INLOT). NPI is a 50-50 joint venture between Pollard Banknote (TSX: PBL) and NGMS with a separate legal entity, board, and dedicated workforce to pursue holistic iLottery contracts in North America by leveraging: (i) PBL’s lottery relationships, procurement, and operational / administrative capabilities from its 40+ years in the highly regulated retail lottery business (primarily printing / distribution of physical scratch off tickets) and (ii) NGMS’s best-in-class iLottery technology and proprietary games library. NPI principally competes against IGT and Scientific Games in the iLottery market (Intralot is a competitor, but enlists NPI’s technology as a subcontractor for New Hampshire’s iLottery contract).

iLottery systems are long-lived and exhibit high switching costs – initial contracts are typically four to seven years and include two to five year extensions that can be exercised at the option of the customer. Once a state lottery agency chooses an iLottery software vendor, such agency has little incentive to switch so long as the product is performing due to the aforementioned public sector incentives and the fact that it is time consuming, disruptive, and potentially costly to switch vendors from a technology, operations, and customer perspective. Contracts also exhibit high renewal visibility since it can take state-sponsored lottery agencies two years to hire procurement consultants, establish a procurement committee, request information, design / run an RFP process, choose a vendor, gain legislative approval for the vendor, and have the vendor complete a system deployment / migration. These long sales and implementation cycles represent an additional barrier-to-entry in the industry.

Instant scratch ticket games are generally state lotteries’ most popular product and generate stable revenue, because customers tend to play instant games on a regular basis. Draw-based games (e.g. Powerball / Mega Millions) exhibit more procyclical participation – more consumers play when jackpots become large and therefore, the lifetime value of instant game players is up to 10x higher than draw-based games players. Therefore, states have frequently featured new games, prizes, and promotional campaigns to drive instant game participation. Lottery revenues are also the most resilient form of gaming revenue during times of turmoil – While industrywide casino and sports betting revenue fell during the GFC, lottery revenues actually grew and during the height of the COVID pandemic (2020), state lottery revenues were down less than 1% while casino and sports betting revenues fell 10% - 40% YOY.

A combination of strained state budgets, the belief that retail lottery participation faces long-term headwinds (due to lower participation rates from millennials), and competition from other forms of digital entertainment has spurred several states to adopt iLottery programs. In 2012, Illinois became the first state to sell lottery tickets (draw-based games) online and Georgia become the first state to offer online ticket sales and instant games (eInstants)[2].

iLottery programs have been more slowly adopted than online sports betting / daily fantasy sports (regulated in ~33 and ~43 jurisdictions, respectively versus iLottery in ~10 jurisdictions) because of concerns around iLottery’s potentially negative impact on retail lottery partners (e.g. c-stores) and the inherent political sensitivity with respect to expanding government-sponsored gambling. However, NGMS’ results in several states (as illustrated below) have clearly and consistently demonstrated that (i) eInstant games reach a different customer base than retail lottery (my research indicates this is also consistent across iGaming in the U.S., which hasn’t cannibalized retail casino revenues) and (ii) iLottery enables synergistic growth in both retail and eInstant sales because a well-run iLottery program can capture and segment data (customer game preferences, spend, purchase frequency, etc.) to better quantify marketing costs and ROIs associated with acquiring, converting, and retaining players through loyalty programs and other data driven omni-channel promotional strategies.

Source: NeoGames September 2022 Investor Presentation

Source: New Hampshire Lottery CAFRs

Source: Virginia Lottery CAFRs

These results are all the more impressive when considering that New Hampshire and Virginia legalized sports betting in 2019 and Michigan legalized iGaming / sports betting in 2021. States lotteries with iLottery capabilities have inherent advantages over other gaming enterprises from their network of hundreds to thousands of widely distributed retail points spread all over a jurisdiction for selling products, marketing (offline-to-online affiliate programs), and servicing customers (cash out functionality). Furthermore, many retail-only state lotteries have an existing web presence that has achieved widespread adoption among players to check winning numbers and monitor jackpots, which provides a built-in advantage for converting existing web traffic to active iLottery players (versus iGaming / online sports betting operators that must start their digital presence from scratch).

NGMS / NPI iLottery Overview (~55% of PF EBITDA)

NGMS became an independent company in 2014, following a spin-off from Aspire, a B2B online gambling software and services company that was publicly traded on the NASDAQ in Stockholm until the recent acquisition that merged the two companies back together. Pre-spin off, NGMS generated most of its revenue from selling iLottery games to European lottery operators (NeoGames pioneered the online instant games market in 2005), but now generates most of its revenue from a turnkey iLottery software platform (NeoSphere) used to launch, operate, and manage iLottery programs and games on a white label basis. The platform hosts both first and third party game content, including multi-state (e.g. Powerball) and local draw based games, 250+ proprietary draw games, Keno, and eInstant games (i.e. arcade-like instant win games that are simple, but more interactive than scratch off tickets).

NGMS iLottery segment generates revenue through a royalty on its customers’ net gaming revenue or NGR (gross wagers less player winnings and player promotions / incentives). NGMS’ typical revenue share consists of (i) 10% - 20% of NGR on eInstant games and 5 - 6% of gross sales from draw-based games processed by NGMS’ platform under turnkey contracts and (ii) 5% of NGR generated by NGMS’ proprietary games (although this can range from 8% - 20% of NGR for customized games). The revenue model and contract structures form a unique combination that generates recurring, high margin, and capital light revenue that is extremely durable (long contract durations with high renewal rates due to switching costs) and exhibits high incremental margins due to a cost base that is generally fixed. It is also important to note that even when a state lottery agency chooses to utilize a competing iLottery platform, NGMS can still generate revenue (with high incremental margins) in the state by selling their games via the competing iLottery platform (e.g. https://www.prnewswire.com/news-releases/neopollard-interactive-to-deliver-industry-leading-game-content-to-the-georgia-lottery-301644234.html).

NeoSphere is the core, back-end software that processes transactions and manages the user and administrator workflows required to manage an iLottery program, including a central gaming system, player account management (PAM), CRM / database marketing, compliance (geolocation / ID verification / AML / KYC, etc.), digital payments, and data analytics modules. NGMS also offers digital marketing experts and data science / analytics teams to help acquire, convert, and monetize digital players and drive omnichannel engagement. The Company’s most recent release includes a data warehouse and business intelligence module that pools all the anonymized data / KPIs of lottery customers so each lottery operator can benchmark performance, strategies, market attributes, and player groups / segmentation versus other lottery operators to improve performance. This offering has real network effects (more data increases value of the offering to all customers) that favor increased adoption of NeoSphere given NPI’s #1 market position.

NPI’s success in North America speaks for itself: ~40% market share by U.S. state contracts, ~70% market share by wagers, and the winner of eGaming Review’s (EGR) North American “Lottery Supplier of the Year” award for three straight years. The largest / most successful iLottery program in the country (Michigan, winner of EGR’s “Lottery Operator of the Year” award two years in a row), the highest grossing first year iLottery program (Virginia which generated more than $800mm in gross sales its first year), and the three iLottery programs with the highest per capita spend in the U.S. (Michigan, Virginia, and New Hampshire) all utilize NPI’s platform.

Pennsylvania, which chose Scientific Games as their iLottery vendor even admitted in their public scoring matrix that NPI was the best option on the merits (technical score and cost) – Scientific Games was awarded a disproportionate amount of points due to their pledge to use in-state, small and diverse business subcontractors to administer the contract (illustrated below).  

NGMS currently has five turnkey lottery platform contracts: Michigan, Virginia, New Hampshire, North Carolina, and Alberta. Michigan results are recorded in NGMS revenue directly (the prime contractor is PBL and NGMS is PBL’s subcontractor – this arrangement was struck prior to the establishment of NPI), while the revenue from other platform contracts run through NPI, which is accounted for using the equity method on NGMS’ balance sheet. Michigan, Virginia, and New Hampshire offer draw-based and eInstant games to citizens, while North Carolina only offers draw-based games. However, NeoGames management mentioned in their 1Q22 earnings call that the North Carolina Education Lottery has informed them of a date by which they would like to launch eInstant games, subject to approval by their governing lottery commission. The Company has demonstrated an ability to upsell states from subscription draw-based game contracts to holistic turnkey contracts (Virginia became an NPI customer in 2016, but solely used NPI’s digital platform for draw-based game subscriptions until 2020, when Virginia expanded their relationship with NPI to include: eInstant games and a la carte digital lottery ticket purchases). I understand that North Carolina state law allows the North Carolina Education Lottery Commission to approve any game(s) that another state lottery already offers, which de-risks the path to launch eInstant games in the state. Last but not least, Alberta uses NPI to offer online casino / live dealer / draw-based games and sports betting to customer.

Potential / Impending Contracts:

·        In September 2019, the Ohio Lottery Commission selected NPI as Ohio’s iLottery platform vendor as a result of an RFP. However, the state’s Controlling Board has not approved the contract yet due to political wrangling and lobbying over if and how retail lottery agents will share in iLottery sales. I expect this matter (and other state legislative processes) to be resolved in 2023 after state elections conclude in November

·        NeoGames announced an agreement to provide Intralot Brazil with iLottery platform, eInstant games, and online sports betting (BtoBet) capabilities in Minas Gerais (Brazil’s second largest state), where Intralot Brazil has operated the retail lottery for over a decade. I am still conducting diligence on the opportunity in the Brazilian market broadly, but at today’s price I don’t believe one needs to have high conviction on the Brazilian opportunity to generate high risk-adjusted returns

In June 2022, NGMS closed on its acquisition of Aspire for 111 SEK (~$10.99) per share. 50% of Aspire shares were acquired for cash and the other 50% of shares were acquired by issuing shares of NGMS at an implied value of $38.01 per share. The transaction was immediately accretive given NGMS shares trading for $13 - $14. Pro forma for the transaction, NeoGames increased its pre-tax income by ~69% while only increasing shares outstanding by ~29%. NGMS / Aspire insiders received the majority of their consideration in the deal in NGMS stock.

Aspire Overview (~45% of PF EBITDA)

Aspire’s business is comprised of three segments that all operate under a similar business model to the iLottery business (NGR revenue share). The Core iGaming segment grew 29% p.a. (€17.8mm to €34.0mm) and Pariplay grew a staggering 64% p.a. (albeit off a low base from €3.1mm to €8.0mm) from 2019 – 2021.

1. 1.      iGaming – This offering is similar to iLottery, but for the online casino operator market. Offerings include: Player Account Management (PAM) / Customer Relationship Management (CRM) software, digital gambling / bingo content, and managed services provider in ~30 regulated markets (white label customer support, risk / fraud management, payments, AML / compliance, and data analytics). Competitors include: GAN (NASDAQ: GAN), Bragg Gaming (TSX: BRAG), Gaming Innovation Group (OB: GIG), Light & Wonder (NASDAQ: LNW), and Playtech (LSE: PTEC)
2. 2.      Pariplay (Content Aggregation) – Pariplay provides a software infrastructure to establish and maintain integrations with a deluge of distinct studio APIs. 140+ casino operators integrate with Pariplay to seamlessly offer their customers access to thousands of games created by 90+ third party studios and Wizard Games (Pariplay’s in-house studio), rather than trying to marshal the technical resources, time, and money to integrate with each studio’s idiosyncratic API separately (and maintain such integrations on an ongoing basis). This business exhibits network effects (casino customers attracts studios, studios provide games to the platform, more games on the platform attracts more casino customers, etc.) and scale benefits (high volume provided by aggregators’ pooled casino customers allows such aggregators to negotiate lower revenue share rates with game studios and lower setup / integration fees from big name studios). Furthermore, each studio finds value in not having to manage each casino operator partner added by Pariplay, having to adapt games to local regulations, or having their own remote gaming server infrastructure in each jurisdiction. Competitors include: NetEnt (owned by Evolution. OM: EVO), Gamesys (owned by Bally. NYSE: BALY), subsidiaries of LNW and IGT, and several private companies (notably Yggdrasil, Play N’ Go, and Microgaming). Note that some of these competitors also use PariPlay to distribute their games though (e.g. Evolution)
3. 3.      Sports Betting (BtoBet) – Omnichannel retail / online / mobile sportsbook platform and services (i.e. managed trading / risk management) with 20+ partners across 46 markets. Competitors include: Kambi (OM: KAMBI), PTEC, and Endeavor (NYSE: EDR), which recently acquired LNW’s sports betting business (OpenBet).

The legacy Aspire business units are a scale and cross-selling story. Aspire’s core iGaming technology business mostly serves European customers, while PariPlay (acquired in 2019) is more focused on the U.S., and BtoBet (acquired in 2020) mostly focused on Latin America and Africa. The combined enterprise can cross-sell more products into the existing customer base and can more easily introduce products into new geographic regions. Aspire’s product breadth could also help NeoGames win holistic lottery contracts similar to the Alberta deal.

I think the B2B iGaming software market is likely to continue consolidating and that possessing scale and product breadth to offer economies of scale to sub-scale B2C operators will be the key to success. The European B2C operator market is likely to stay fragmented and I think the in-sourcing thesis in the U.S. is somewhat overblown – The largest casino operators will own and operate their own technology (no different than how large megabanks own / operate their own core banking software), but there are more than 500 tribal casinos in the U.S. that will likely require third-party vendors (akin to how small and medium sized financial institutions rely on Fiserv / FIS / Jack Henry). My impression is that Aspire has an impressive management team with a strong track record of generating high returns on capital, which I expect to continue for the foreseeable future as more geographies choose to legalize and regulate gaming activities.

Capital Allocation and M&A

NeoGames has real platform value that should continue to grow as they win more iLottery contracts and  establish more core iGaming relationships through Aspire. Specifically, I like the prospect of the Company acquiring content / game studios that can immediately realize substantial revenue synergies through leveraging the increasingly scaled distribution of the NeoSphere (iLottery) and PariPlay (casinos) platforms. Aspire has specifically mentioned interest in acquiring live dealer capabilities in the past as well, which is an attractive market that could benefit from the distribution and reach of Aspire’s core iGaming system.

On the flipside, I believe that NGMS possesses substantial strategic value to potential acquirers. The most logical acquirer of NGMS is PBL, because PBL already has realized tremendous success working with NGMS via the NPI joint venture and acquiring NGMS would mitigate PBL’s reliance on NGMS’ mission critical technology and B2C marketing / data analytics know-how in order to operate NPI and capitalize on the wide open North American iLottery opportunity. PBL could also realize cost synergies by owning / operating NPI as a subsidiary versus the additional standalone costs that come with NPI’s JV structure. I also believe foreign lottery operators are logical potential acquirers because (i) most have limited growth prospects within their current market(s) and (ii) acquiring NGMS represents the most swift and low-risk path for such operators to enter the U.S. market. Examples of potential foreign lottery operator buyers include: La Française des Jeux Société anonyme (ENXTPA:FDJ), The Lottery Corporation (ASX: TLC), OPAP (ATSE: OPAP), and Allwynn (the privately-held parent company of Sazka, which is a NeoGames customer and is partially owned by Apollo). I also think that a large B2C platform, such as Flutter (LSE: FLTR) could make for an interesting acquirer given its ownership of Sisal (regulated lottery operations in Italy, Turkey, and Morocco) and FanDuel, which could cross-sell its sports betting capabilities to lottery agencies seeking such services. IGT and Scientific Games are also potential acquirers, but I think an acquisition of NGMS would raise significant anti-trust hurdles that would be difficult to clear. Intralot is a logical acquirer as well, but I think they likely would lack the financial firepower and market position to get a deal done.

ESG

Some investors do not invest in the gaming industry due to ESG / mandate restrictions or moral objections. However, (i) from a practical and empirical perspective, I believe that regulated lotteries and casinos better serve the interests of society than prohibition and (ii) one can easily make the case that lotteries and lottery technology / service providers have a net positive impact on society given their role in generating cash to fund important public services and institutions such as public education. Other major institutional investors seem to agree – NGMS’ lender is Blackstone (NYSE: BX), who invests on behalf of more than 100 million pensioners. Furthermore, lottery operations typically generate a 30% earnings margin (60% prize payout ratio and 10% operating / vendor costs), 100% of which is used to fund public education – This generally provides more bang-for-your-buck to public services than other forms of gaming taxes.

Additionally, NGMS deploys responsible gaming limit software modules that can be set both at the player (self) and operator level, in addition to in-game alerts and other reminder campaigns that promote responsible gambling. Rich data captured by iLottery is uniquely situated to more effectively identify and ultimately address problem gambling. Conversely, it is difficult to identify problem gambling through the traditional retail lottery channel due to anonymity / lack of data to track player behavior.

Risks and Mitigants / Considerations

·        Customer concentration / re-contracting

o   Michigan State Lottery – Represented 45% of NGMS 2021 revenue. Michigan’s economy is generally cyclical and dependent on the automotive industry

§  Michigan State Lottery revenue concentration declined from 55% of NGMS revenue in 2020 and I expect concentration to decline as with new contract wins and less mature contracts ramp up

§  My channel checks point to 3Q22 lottery growth in Michigan

·        Management / Execution

o   Aspire M&A integration

o   Reputation and maintenance of ongoing deployments / operating results

·        Governance

o   Company and management team have been friendly to minority shareholders in the past

·        Regulation

o   Adverse regulatory changes

§  Whether the Wire Act applies to state lotteries has historically been a point of legal contention. Several legal precedents now exist, including suits won by NPI / New Hampshire (U.S. Court of Appeals) and IGT (U.S. District Court – Rhode Island) in 2021 and 2022 that support the Wire Act not applying beyond sports betting

o   Negative repercussions of failing to adhere to regulations

·        State iLottery legalizations failing to materialize as expected

·        Technology

o   Third party service software / providers

o   Cyber disruptions

o   IP litigation

o   Obsolescence

·        Cyber / operational disruptions

·        Relationship with PBL (JV partner in NPI)

o   NGMS must maintain a good commercial relationship with PBL to grow NPI and maintain the Michigan State Lottery contract (which was a joint win by PBL and NGMS prior to the establishment of NPI).

o   NPI’s performance depends not only on NGMS, but also PBL’s operational execution to procure new contracts, deliver high service levels, regulatory compliance, etc.

o   PBL is the prime contractor for the Michigan State Lottery and NGMS is PBL’s subcontractor. As such, NGMS could be negatively affected by a dispute between PBL and the Michigan State Lottery

§  PBL’s interests are aligned with NGMS as 50% owner of the NPI JV, PBL relies on NGMS for iLottery capabilities and proprietary game content, and PBL is controlled by a long term, economically rational owner (Pollard family, ~64% ownership) with a history of being strong operators and capital allocators

·        FX – Historically labor costs were primarily denominated in Shekels (Israel) and Euros while most revenue is generated in U.S. Dollars, but this will change with the Aspire acquisition (less revenue is dollarized)

Catalyst

1. Ohio legislature approves NPI contract

2. New RFPs announced by states / new contract wins 

3. EBITDA / FCF / earnings growth materializes

4. Updated / improved financial disclosure regarding NGMS / Aspire synergies. Alberta / Brazil contract potential, etc.

5. Accretive M&A / capital allocation

6. Buyout offer